Patents, Monopoly, and Efficiency

We see that the output of the patented consumer good will be less than optimum. There is some waste, in this sense: resources that could be used to produce patented consumer goods worth p0 per unit to consumers will instead be used to produce other goods and services only worth c per unit. Here, recall, we are using the opportunity cost concept: the cost of a resource the is the most valuable alternative product the resource could be used to produce. Thus the marginal cost, c, is also the value of the other goods that could be produced by the resources used to increase the output of the patented good. The value of the additional patented output, however, is p0, which is greater. Thus it is wasteful to divert resources from the production of the patented good to other goods which are worth less per unit. .

How much waste is there? We may use the consumers' surplus method to get a rough estimate. If output were expanded from Q1 to Q2, consumers' surplus would be increased by the area of the triangle xyz. This is a measure of the waste that results from monopolization of the patented product.

We should stress that, despite the waste, consumers are better off than they would be had the invention not occurred. With the invention and the patent-based monopoly, the consumers enjoy a consumers' surplus measured by the area of the triangle vxp0. This is a net benefit the consumers would not enjoy had the invention not occurred. On the other hand, if the invention were created and (somehow) priced at cost, c, the consumers' surplus triangle would be vyc. the maximum net benefit (per period) that can be realized from the invention. With the patent and the monopoly, the net benefit to society from the invention is the sum of the consumers' surplus vxp0 and the monopoly profit p0xzc. This is less than the maximum, of course, but nevertheless positive, better than nothing. What this illustrates is that patenting is not an ideal solution to the incentive problem, but is a "second-best" solution.

How Long Should a Patent Last?