Prizes create deadweight loss through taxes and administrative costs
Daniel F. Spulber, 2015 - Elinor Hobbs Distinguished Professor of International Business and Professor of Strategy at the Kellogg School of Management at Northwestern. “Public Prizes versus Market Prices: Should Contents Replace Patents,” 97 J. PAT. & TRADEMARK OFF. SOC'y 690 (2015). Hein Online, Accessed via University of Michigan //DH
In this article, I explain why arguments for replacing market prices with public prizes are incorrect. First, I show that the standard deadweight welfare loss argument is a fallacy because it assumes government prizes create no economic distortions - a classic case of a "free lunch." Yet, the government must collect taxes to pay for the prizes and such taxes create substantial deadweight welfare losses." The bureaucratic and compliance costs of the taxation system are substantial as well. The standard argument for public prizes assumes that the government would incur no costs of administering the prize system or managing subsequent technology diffusion and commercialization - another free lunch. Yet, the administrative costs of operating a government prize system and commercializing technologies are significant.