Professional Documents
Culture Documents
Cardinal Analysis Application To Patent and Crime
Cardinal Analysis Application To Patent and Crime
Consumer
surplus
Price
Competitive
firm
Quantity
Monopolist Pricing
• Another way of saying the same thing:
• Monopolist sets marginal revenue = marginal cost
• Meaning: it doesn’t want to lose money by selling an additional unit (if marginal
revenue – marginal cost < 0)
• We could calculate marginal revenue in much the same way
Monopolist
Price
Competitive
firm
Quantity
Higher Profits, But Deadweight Loss
Consumer surplus
Monopoly profits
Deadweight loss
Price
Competitive
firm
Quantity
Monopolist Pricing
• This higher price leads to producer surplus
• It also produces “deadweight loss”
• Deadweight loss is inefficiency caused when a transaction that would be
beneficial to both parties doesn’t occur
• There are people who want to buy the patented or copyrighted good for more
than its marginal cost
• Those would be efficient transactions because they would make both producer
and consumer better off
• But they won’t happen because the price of the good is too high
Higher Profits, But Deadweight Loss
Consumer surplus
Monopoly profits
Deadweight loss
Price
Competitive
firm
Quantity
Monopolist Pricing
• The amount of surplus that is lost is the deadweight loss
• If the monopoly price of the good is substantially higher than the
marginal cost, deadweight loss can be substantial
• This is a severe economic negative
• Called a “static inefficiency” – in equilibrium, people who want to buy a good
cannot purchase it
• This deadweight loss represents the main downside of IP
• In designing an IP system, must strike a balance between dynamic efficiency
(incentives to innovate and create) and static inefficiency (deadweight loss)
IP Design
• The existence of deadweight loss means that we don’t just want to give
IP rights for everything
• Every time someone acquires IP, there will be monopoly pricing and thus
deadweight loss
• We want to be judicious in where we award IP
• Theory: award IP rights only where necessary to incentivize innovation
• IP comes with a cost (deadweight loss)
• Make sure that the benefit (innovation) outweighs that cost
IP Design
• Theory: award IP rights only where necessary to incentivize innovation
• Remember, the original problem with IP was free-riding:
• Company A creates, then Company B free-rides off of that creation, takes the
idea, copies it, and undersells Company A
• The fact that Company B doesn’t have to expend resources in creating is what
causes the problem
• This allows Company B to undersell Company A
IP Design
• Because of this, we care about two separate costs:
1. The original cost of creating/inventing
a) The higher this cost, the greater the free-riding problem
b) But if creation is easy/cheap, we may not need IP
2. The cost of copying
a) The lower this cost, the greater the free-riding problem
b) But if copying is very costly, we may not need IP
IP Design
1. Only give patent rights for “novel” (new) inventions
a) If it’s not new, then it already exists and we don’t need to incentivize its
creation
2. Don’t give patent rights for “obvious” inventions
a) If it’s obvious, then it can’t have been hard to invent
b) Low cost of creation => smaller free-riding problem
3. Don’t give infinite patent rights or copyrights
a) As the duration of the IP right ↑, the incentives it creates ↑; but deadweight
loss ↑ as well
b) Make the IP last long enough to incentivize the inventor/creator
Demand for Crime
• Summing the number of crimes committed by each individual gives
the aggregate number of crimes in society.
• An increase in P will decrease the number of crimes.
• Corresponds to consumer’s demand curve sloping downwards.
• Demand curve for crime
The first Law of deterrence
• People commit less crime when the expected punishment increases.
• How much do crime rates respond to increases in expected
punishment.
• When supply of crime is elastic policy makers can reduce crime
significantly by moderate increases in expected punishment.
• When supply of crime is inelastic then other variables like
employment rates, drug addiction, quality of schooling become
important.
A supply and average revenue diagram for theft.
• The vertical axis shows dollars stolen per hour--the "wage" that
thieves receive.
• The supply curve S, like any other supply curve, shows how much
labor will be supplied at any wage--how the number of hours spent
stealing depends on the number of dollars per hour that can be stolen.
• The average revenue curve AR shows how the revenue from an hour
spent stealing varies with the amount of theft. As the number of
thieves stealing increases, the return per hour falls, so AR slopes
down, just like a demand curve.
Market Equilibrium
P S T.A = Total
amount stolen(A+B)
40
30
A (PS
20
Returns
10
B © D
(VL)
0 20 40 60 80
Q
Number of hours
32
• The total amount stolen per year is average revenue--the amount
stolen per hour--times the number of hours of theft per year. The area
shown as A+B.
• The thieves receive that as income, bear costs equal to C, and receive a
producer surplus equal to (PS).
• The victims lose the amount stolen and receive nothing. The net loss
L, the area under the supply curve, is equal to the loss to the victims
minus the gain to the thieves.
• Supply and revenue curves are one way of looking at the market for
theft and analyzing its costs.
• Another is as an example of the inefficiency of rent seeking. Both
thieves and victims are competing for possession of the same objects--
all of which, initially, belong to the victims.
• Expenditures by a thief either result in his getting the loot instead of
some other thief or in his getting the loot instead of its owner keeping
it.
• Defensive expenditures by the victims are also rent seeking--the
function of a burglar alarm is to make sure that the property remains in
the hands of its original owner.
• What we have really been doing is showing the advantage of a system
of secure property rights.
• If property rights are insecure, some individuals have an incentive to
spend resources trying to get property transferred to them, while some
have an incentive to spend resources keeping property from being
transferred away from them.
• That is true whether the transfer is done by private theft or government
taxation. Not earning taxable income or not buying taxed goods are
(costly) ways of defending yourself against taxation, just as installing
a burglar alarm is a (costly) way of protecting against theft.