Patents

A patent provides a right under law to produce and market a good for a specified period of time

Benefits of patents for businesses:

1. Helps to develop a competitive advantage via a unique feature
2. Provides a source of monopoly power
3. Barriers to entry maintain supernormal profits in the long run
4. Enables firms to develop into a new market e.g. through a disruptive technology that has been patented

Justifying patent protection for the wider economy

1. Encourages Research and Development
2. Encourages exploitation of external economies of scale e.g. research projects with universities
3. Innovation is encouraged e.g. gains in dynamic efficiency that then reduce costs for consumers
4. Macro benefits, e.g. multiplier effects, gains in export competitiveness, a source of economic growth
5. Investment in research in turn in the long run may benefit society as a whole e.g. external benefits from health research, environmental patented technology

Some counter-arguments on the effects of patents:

1. Patents allow supernormal profits to be made – a transfer of wealth to highly profitable monopolists
2. Patents may stifle competition or innovation by others
3. Alternatives to patents might help stimulate research e.g. subsidies to university research
4. Disadvantages of monopoly e.g. loss of allocative efficiency as prices charged are well above MC
5. May cause x-inefficiency due to the lack of contestability in the market
6. Costs of enforcing patents