Welfare Implications Of Choosing A Legally Enforceable Intellectual Property Rights Regime

Consider again Fig. 15-3. The new idea can be produced through one of two methods2: (1) fully publicly funded research and no IPRs or (2) privately funded research and strong IPRs. Because no IPRs are attached to the new idea in method (1), assume extra units are available at the MC of production (price equal to Pc, which is nearly zero). The social welfare derived from production of the new idea is, then, equal to the consumer surplus generated (area of triangle fePc) minus the cost of the investment (area Obcl). With private property rights (second method), assume the private funding agent is able to perfectly price discriminate. There is, then, a producer surplus generated by the granting of IPRs equal to area Pcfaj minus area Pcbcd. For the subset of all potential new ideas that would be produced under either method, choosing private property rights over public investment causes both a transfer of benefits from consumers to producers (area diaj - fbci) and a net welfare loss to society (equal to the triangle aej).

Assume further that, for the rest of the potential new ideas, government funding is always available when, in Fig. 15-3, area Oghl is less than area Pcfe (i.e., the sunk cost is less than the total consumer surplus generated) and it is never available when area Oghl is greater than area Pcfe (i.e., the sunk cost is greater than the consumer surplus generated).3 There is, then, always a net welfare loss from choosing private property rights. Choosing a legal IPRs regime is, therefore, only

2 There are, of course, other combinations but the extremes are used for clarity.

3 These assumptions are equivalent to assuming that no government failure exists in the allocation of public research funds.

economically justifiable if public research dollars are limited and the net welfare loss is deemed to be worth incurring in order to capture the consumer surplus associated with shifting the limited public resources to research activities that private agents are not willing to perform.

An important implication of this theory is that if a society follows a public policy of a strongly enforceable IPR regime, then it ought to not directly perform research that private agents desire to undertake. Public resources should be directed towards the activities depicted in Fig. 15-3 where area Oghl is larger than area Pcfaj but less than or equal to area Pcfe. In other words, public organizations should not "crowd out" private activity and should only perform research that private agents are unwilling to undertake. This is also implied by Diamond (1999), who found that judicious public expenditures on basic research can actually "crowd in" private research expenditures.

The size of the DWL will, then, increase in response to the following two situations: public expenditures in areas of private activity and private strategic behavior in the employment of the publicly bestowed patent privileges. The following two sections explore the second situation in the context of Canadian agricultural biotechnology.

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