Scenario one

The case of perfectly competitive private production of a new idea in the absence of legally enforceable IPRs is illustrated in Fig. 15-2 below.

Figure 15-2. Failure of private production of a new idea under perfect competition and no legally enforceable IPRs

In Fig. 15-2, area Obcl represents the sunk cost that is necessary to incur in order for the potential new idea to be produced. The marginal cost curve (i.e. the supply curve) after the discovery is flat and virtually zero (PceMC), reflecting the low and constant costs of disseminating knowledge. Given a downward-sloping demand curve (D) that intersects with the supply curve {PceMC) at point e, the market price of extra units of the new idea would be Pc, which is approximately equal to zero. Since line PceMC virtually lies on top of the x-axis (because MC equals approximately zero), the area enclosed by OPcex represents the total revenue (approximately zero) derived from the new idea. Therefore, because area Obcl (expected total private cost) is larger than area Pcex (expected total private benefit), the new idea will not be produced through the actions of private agents.

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