Grants are superior – they can incentivize innovation in areas with insufficient market demand

Grants can fund innovation whose social welfare value exceeds the market value of the product. Rachel Sachs notes,

Where the general population's willingness and ability to pay for a particular drug track the social value it contributes, patents are thought to provide a relatively efficient way of incentivizing the development of socially valuable drugs. But each of these factors - willingness to pay and ability to pay - presents a well-known bias, through which innovation incentives will be directed away from certain types of treatments or diseases with high social salience. 216

Willingness to pay creates a mismatch between social and private value. For some innovations, social benefits exceed individual benefits; for example, vaccines protect both the vaccinated individuals and others in society through the process of herd immunity. 217 Optimism bias may also decrease willingness to pay because people don't think they will get sick, and therefore underpay for preventive measures, decreasing incentives for scientists to develop those measures. 218 Finally, short-term bias may cause individuals to systematically undervalue expensive cures as opposed to ongoing treatments, which are cheaper per instance but costlier over time. 219 These distortions are not limited to the biomedical context - individuals may undervalue vehicle safety innovations that protect other drivers, upgrades that prevent house deterioration down the road, and technologies like solar roofs that pay for [*45] themselves in long-term energy savings. 220

Ability to pay also limits market incentives and makes them inadequate for some socially valuable innovations. Consider Chagas, chikungunya, and other Neglected Tropical Diseases, which in the United States afflict mostly the poor and underinsured; 221 mental illness is similarly more prevalent among those populations. 222 Because those who can't pay for drugs can't create market demand, we should expect investment in treatments for those diseases to be substantially less than the social value of such innovation. 223

These are not the only ways that market demand can create problematic incentives to pursue certain types of innovation. As Kevin Outterson has long argued, antibiotic resistance is a tremendous problem of global scale, caused in part by warped incentives for development of new antibiotics. 224 Antibiotic overuse limits the value of antibiotics for future users, but sellers of new antibiotics profit more from selling lots of the antibiotics before resistance sets in, rather than limiting their use. 225 Accordingly, new antibiotics aren't kept in reserve, and society loses the very large benefit of having a robust arsenal of last-resort antibiotics. 226 Unfortunately but perhaps unsurprisingly, the past several decades have seen little in the way of new antibiotics, and the looming threat of global antibiotic resistance is increasingly worrisome. 227

Grants can step in to support research in these areas of unmet need. In 2012, for instance, the National Institute for Allergy and Infectious Diseases funded eight Tropical Medicine Research Centers through P50 Research Center grants. 228 The Centers are located in regions where the neglected tropical diseases are prevalent: Brazil, India, Ghana, and Peru. 229 These grants [*46] both support useful research in these areas of unmet need and "build capacity to enable [the Centers] to conduct future clinical trials, implement new treatment and prevention strategies, and develop novel vector control strategies." 230 In other words, the NIH aims to use grant funding to establish the capacity for future useful work even after initial funding has ended. 231 The Institute funds training to build research capacity, focusing on institutions in developing nations. 232