INNOVATIO

N POLICY
 1. If you had the choice of
living today or one hundred
years ago, which would you
prefer and why? What about
the choice between now
and one hundred years in
the future?

MILLER CHAPTER 2:
“INNOVATION”
INNOVATION
 6. What are the innovations
from the last five years
that you think are the
most important in your
life and why? Can you
put a rough dollar value
on the personal loss you
would suffer if these
innovations had not
occurred, perhaps
because they were
suppressed or
discouraged by
government policies?
MILLER CHAPTER 2:
“INNOVATION”
NORMATIVE JUSTIFICATION
FOR INTERVENTION
Market Failure
 5. Suppose you are about to start an innovative, high-
MILLER tech company in one of two states. You expect before-
tax profits to be about $100,000 per year. Both states
CHAPTER have similar living conditions, climate, and other
amenities, but the tax rate in state A is 17 percent,
2: while the tax rate in state B is 7 percent. By how much
will your annual after-tax profits differ between the
“INNOVATI two states? From a business perspective, which state
is a preferred location?
ON”
 1. Innovation as public goods
2. Innovation externalities
3. Information asymmetry in financing

MARKET FAILURE
AND INNOVATION
INNOVATIONS AS PUBLIC
GOODS
• Free riders can reverse engineer and copy the developments of innovators
• Free riders’ production costs are lower than those of the innovators
• Free rider problem disincentivizes expensive research necessary to innovate
• Innovations would thus be underprovided
• Governments correct this problem by establishing intellectual property rights
 1. Why is it true that
inventions are “a dime a
dozen”?
2. Are those resources that
are spent on R &D but do
not yield profitable
innovations wasted? Why
or why not?

MILLER CHAPTER 2:
“INNOVATION”
INNOVATIONS
EXTERNALITIES
• Positive externalities from the R & D process are called knowledge spillovers
• Other individuals and firms gain access to information about innovations
• The result is unpriced positive impacts on third parties who did not innovate
• Without intervention these spillovers would be underprovided
• Government thus wants to encourage these spillovers
INFORMAT
ION
ASYMMET
RY AND • Hidden character type

INNOVATI • Hidden action type

ON
FINANCIN
G
INTELLECTUAL
PROPERTY
• Intangible property in ideas
• Balances:
 Protecting mental efforts WITH
 Encouraging the flow of innovative ideas
Patents

Trade secrets
RESPONSE
ICT and Industrial design S TO
MARKET
Copywrite protection
FAILURE
Trademarks
PATENTS
Exclusive control over invention (20 years)

Intended to promote innovation

But also creates a monopoly

TRADE
SECRETS
Confidential
Simpler
Faster
Cheaper
Longer
INTEGRATED CIRCUIT
TOPOGRAPHY (ICT)
Similar to a Patent
10 Years of Protection
 Similar to Patent

INDUSTRI Similar to Copyright

AL DESIGN
10 Year Protection
 Creative works
Lifetime + 50 years
Occurs automatically
Fair dealing exception

COPYRIGHT
TRADEMARK
S
Word or design used to identify a product
ACTIVITY: Copyright
NAME Patent
THAT Trademark

INTELLEC Industrial Design

TUAL Integrated Circuit Topography

Trade Secret
PROPERTY
 #1: APPLE M1
COMMERCIAL
#2: MICROSOFT
WINDOWS
COMMERCIAL
#3: KFC COMMERCIAL
#4: PHILIPS
COMMERCI
AL
#5: NIKE SWOOSH
COMMERCIAL
#6: OMEGA
BOND
COMMERC
IAL
#7 TAYLOR MADE
This Photo by Unknown Author is licensed under CC BY-SA
DIRTY MONEY: “DRUG
SHORT”
DRUG SHORT QUESTIONS
1. What type of market failure best explains what happened in this case?
DRUG SHORT QUESTIONS
2. How does the case relate to the theme of corporate social responsibility?
DRUG SHORT QUESTIONS
3. What does this case tell us about the two policy objectives (protecting property
rights and stimulating research and development) that government is trying to
balance in creating innovation policy?