Summary on Patents

We can draw some other conclusions. Under a patent system in which the patent has a term of N years (including renewals), profit-oriented inventors will try to develop all inventions for which the profit (p0xzc) compounded over N years is greater than the development costs. This is not optimal. The optimal rule would be to develop all inventions for which the maximal consumers' surplus (vyc) compounded for the indefinite future is greater than the development cost. There would be a proportion of inventions that would satisfy the second, optimal test, that would not be profitable to develop. Thus, even with an optimal patent term, some socially useful patents will fail to be developed. In this sense, again, the patent system (even with an optimal patent term) is a second-best system. The incentive problem is only partially solved, and there could be a case for other public policies to encourage invention.

We may summarize the ideas in this section as follows: Patents are a response to the incentive problem, and they can create some incentive to invention. However, patents create monopolies, and thus lead to some waste of resources as the monopoly maximizes its profits by restraining outputs. Because of this waste, it makes sense to limit the term of a patent. There is, in principle, an optimal term for patents, though in practice it would be very difficult to figure out what that optimal term is. In any case, a patent system is a second-best policy and an incomplete solution to the incentive problem. We should stress that second-best is better than third-best or worse still; but because the patent system is a second-best system, there may be scope for other, complementary public policies to encourage the production of inventions.

These conclusions will apply also to other forms of intellectual property and the corresponding markets for information products.

Other Forms of Intellectual Property