TECHNOLOGY SPILLOVERS, INDUSTRIAL POLICY AND PATENT PROTECTION

A potentially important type of positive externality is called a technology spillover the impact of one firm’s research and production efforts on other firms’ access to technological advance. For example, consider the market for industrial robots. Robots are at the frontier of a rapidly changing technology. Whenever a firm builds a robot there is some chance that it will discover a new and better design. This new design may benefit not only this firm but society as a whole because the design will enter society’s pool of technological knowledge. That is the new design may have positive externalities for other producers in the economy.

In this case the government can internalize the externality by subsidizing the production of robots. If the government paid firms a subsidy for each robot produced the supply curve would shift down by the amount of the subsidy and this shift would increase the equilibrium quantity of robots. To ensure that the market equilibrium equals the social optimum the subsidy should equal the value of the technology spillover.

Some economists believe that technology spillovers are pervasive and that the government should encourage those industries that yield the largest spillovers.

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