The CP solves better through commercialization and follow on innovation. Patents’ monopoly power lowers social welfare

Most debates about government funding of science and technology revolve around the extent to which the government should support research, usually measured in dollars. Those against government funding will point out crowding out effects and the dangers of government picking winners, while those for it will argue that because scientific discovery produces positive externalities it will be underproduced by a private market. What’s left out of these debates is the effect of how the government chooses to support R&D. Patents have been a standard method for centuries but their distortionary and monopolistic effects work to offset their benefits. Prizes can offer all of the benefits of patents without the costly second order effects.

Properties of Technology

Evaluating the effectiveness of prizes and patents requires understanding the value of what they are trying to promote: technological growth. There are two elements to technological growth: Zero-to-one improvements and one-to-n improvements. Both are required for it to have large effects on human welfare. Zero-to-one improvements are new discoveries that extend our understanding and control of the universe. The Wright Brother’s first flight at Kitty Hawk was a zero-to-one moment. One-to-n improvements take the ideas and prototypes of zero-to-one and commercialize them. The growth of aviation from a scientific marvel to mass-market product was one-to-n. Mass production, vertical integration, and learning by doing lower the costs of new technologies and bring them to a wide audience. One-to-n improvements are the link between technological discovery and the impacts on human welfare that we actually care about.

Another important aspect of technological growth is that ideas are infinitely copy-able. This is unlike all other physical goods. If one wishes to share a pie they made, they must take slices away from their own portion. Once an idea is discovered, it can be spread to every mind without requiring anything to be taken from the originator. Physical goods are divided among people, but ideas are multiplied. This property of ideas implies that we are losing out whenever ideas are not maximally spread. Since the marginal cost of producing new copies of an idea is basically zero, if there is anything to be gained from spreading an idea, it should be done.

Patents vs Prizes

These two properties of technological growth usefully frame the properties of prizes vs patents. Both strategies of government support target zero-to-one technological growth. Prizes do this directly by simply paying for new discoveries, while patents reward inventions with the promise of monopoly profits. Where they begin to differ is in their effects on the one-to-n growth.

The promise of monopoly profits incentivizes individuals and firms to invent. Since invention produces a positive externality, this government incentive pushes the supply of new ideas closer to the social optimum. However, several costs either push against the supply increase promoted by patents or dilute the value of the ideas that are protected by them. Patents reward idea creators by restricting the spread and use of the idea after its creation. Since ideas cost nothing to spread once they are created, restricting the number of people who can use them after conception is a waste of resources. To maximize the social impact of an idea, it should be spread and productized as quickly as possible, but this restriction is required to produce monopoly profits. Patents require resources to enforce. Tens of billions of dollars are spent by inventors and firms each year litigating patent infringement in courts, and the average case costs more than three million dollars. The time and money spent on litigation dissipates the incentive that patents provide for invention. Patents can also harm future innovation by attaching licensing fees to combinations of and incremental improvements to patented ideas. All of invention is building off of previous ideas to an extent. Since patents add costs to iteration and the spread of new ideas/technology, they work against their original goal of subsidizing invention.

Prizes also incentivize invention but in a simpler way. Instead of promising to enforce monopoly profits, prizes simply pay the inventor upfront. For any given patent there is a quantifiable value of monopoly rights which depends on the marginal cost of production and demand for the product. Monopolies can sustainably charge a price above what it costs to make their product (including opportunity cost) because no other firm is allowed to enter the market and undercut them.

A prize could be awarded equal to the value of these monopoly profits. This transfer would have exactly the same effect on the supply of innovations as the patent, but without incurring the costs of monopoly. The rewarded idea could be spread openly, commercialized by anyone, and built upon by other inventors.