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Intellectual Property & External Consumption Effects: Generalizations from Pharmaceutical Markets

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  • Tomas Philipson
  • Stephane Mechoulan

Abstract

There is a long-standing literature that recognizes that an efficient solution in correcting a consumption externality is through applying subsidies and taxes that line up private incentives with social ones. An equally long-standing literature tackles the appropriate methods of generating the efficient amount of R&D into goods that only have private consumption effects, e.g. the analysis of the welfare effects of patent regulations. This paper analyzes the joint problem of the optimal provision of R&D and consumption incentives for goods that at the same time undergo technological change and have external consumption effects. For good with external effects, just as is the case for goods with only private effects, ex-post static efficiency may have to be sacrificed for dynamic efficiency. For goods with only private consumption effects, it is well-understood that efficient competition ex-post leads to insufficient R&D incentives ex-ante, which is of course the common rationale for patents. For external effects, this analogy has the important and unrecognized implication that classic interventions to solve externality problems, such as Pigouvian taxes and subsidies, may often be inefficient under technological change. In many cases, arguing for Pigouvian solutions in presence of technological change is analogous to arguing for competitive markets for new inventions (!), as both argue for ex-post efficiency rather than dynamic efficiency. The results are discussed in the context of the pharmaceutical industry which simultaneously is one of the most R&D-intensive industries and one for which consumption of its output often seems to involve external effects, e.g. through human rights-based access issues.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9598.

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Date of creation: Apr 2003
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Handle: RePEc:nbr:nberwo:9598

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References

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  1. Grossman, G.M. & Lai, E., 2001. "International Protection of intellectual Property," Papers 215, Princeton, Woodrow Wilson School - Public and International Affairs.
  2. Michael Kremer, 2002. "Pharmaceuticals and the Developing World," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 67-90, Fall.
  3. Charles I. Jones & John C. Williams, 1999. "Too Much of a Good Thing? The Economics of Investment in R&D"," Working Papers 99015, Stanford University, Department of Economics.
  4. Parry, Ian & Pizer, William & Fischer, Carolyn, 2000. "How Important is Technological Innovation in Protecting the Environment?," Discussion Papers dp-00-15, Resources For the Future.
  5. Tomas Philipson, 1999. "Economic Epidemiology and Infectious Diseases," NBER Working Papers 7037, National Bureau of Economic Research, Inc.
  6. Joseph P. Newhouse, 1992. "Medical Care Costs: How Much Welfare Loss?," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 3-21, Summer.
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Cited by:
  1. Tomas J. Philipson & Gary Becker & Dana Goldman & Kevin M. Murphy, 2010. "Terminal Care and The Value of Life Near Its End," NBER Working Papers 15649, National Bureau of Economic Research, Inc.
  2. Kuhn, Michael & Wrzaczek, Stefan & Prskawetz, Alexia & Feichtinger, Gustav, 2011. "Externalities in a life cycle model with endogenous survival," Journal of Mathematical Economics, Elsevier, vol. 47(4-5), pages 627-641.
  3. Laxminarayan, Ramanan & Parry, Ian W.H. & Smith, David L. & Klein, Eili Y., 2010. "Should new antimalarial drugs be subsidized?," Journal of Health Economics, Elsevier, vol. 29(3), pages 445-456, May.
  4. Tomas J. Philipson & Anupam B. Jena, 2005. "Who Benefits from New Medical Technologies? Estimates of Consumer and Producer Surpluses for HIV/AIDS Drugs," NBER Working Papers 11810, National Bureau of Economic Research, Inc.
  5. Darius Lakdawalla & Neeraj Sood, 2005. "Insurance and Innovation in Health Care Markets," NBER Working Papers 11602, National Bureau of Economic Research, Inc.
  6. Kessing, Sebastian G. & Nuscheler, Robert, 2006. "Monopoly pricing with negative network effects: The case of vaccines," European Economic Review, Elsevier, vol. 50(4), pages 1061-1069, May.

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