Sunday, March 11, 2007

Prizes vs. Monopolies

Joe Stiglitz says that prizes are preferable to patent protected monopolies when it comes to spurring research and development.

Mankiw warns that prize money has to be paid for by tax increases which could be as bad or worse than the monopolies.

I am reminded of the result that monopolies are only can be efficient if they are allowed to charge their customers different prices based on the willingness to pay.

See, monopolies are bad because in an effort to soak the rich or desperate, they raise prices and force the poor out of the marketplace. The result is too few goods at too high of a price. There is a way out, however. Let the drug companies charge the rich exorbitant prices and then give the poor a break.

If the point of a monopoly is to spur innovation then you might as well let them take all of the surplus. Why leave money on the table, if you believe that it will be used for innovation?

Not only is this more economically efficient, but it also increases equality and since it results in price reductions for the poor, politically palatable - a very rare policy hat trick!

25 comments:

pickster2021 said...

I don't see the ability of a monopoly to spur innovation.

Competitive markets spur innovation. This is not the case for monopolies. They do not worry about the unit cost of production, because lowering it would not matter to them. They are the sole producer of the product, so in the long run, the cost per unit is negligible because every unit will be demanded (this is sufficient marginally speaking for their cost to equal revenue).

Prize money, however, implies a winner. A winner implies a competition. And with competition, comes innovation.

Karl Smith said...

In this case the way you get to be a monopolist is by coming up with a new drug.

So, the lure of potential monopoly profits gets firms to invest in finding new drugs.

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