02

Public good is:

• non-rival – the consumption of this good does not reduce its availability to other individuals

• non-excludable – no one can be excluded from consuming public good

Knowledge is the ensemble of

• knowledge,

• expertise,

• skills and

• information

Knowledge is considered to be a public good because it is

• non-rival, i.e. it remains in circulation no matter how many people consume i

• non-excludable – no one can be excluded from consuming knowledge

• Tacit knowledge is “the deeply personalized knowledge possessed by individuals that is virtually impossible to make explicit and to communicate to others through formal mechanisms” (Dicken, 2007:99)

• An example is represented by the knowledge contained in experienced staff members

• Codified knowledge is “the kinds of knowledge that can be expressed formally in documents, blueprints, software, hardware, etc.”

• Indivisibility

• Uncertainty

• Externalities

• Economic indivisibility means it is impossible to exchange and pay for a good in proportion to the exact quantity used

• Technical indivisibility is the impossibility of dividing a good, once it is exchanged, into amounts to be used for production or consumption

• non-convexities in production functions

• strong incentives for firms to monopolize markets

• this mainly concerns the outcome of R&D with respect to

  • the inputs (technological uncertainty)

  • and whether there will be a future demand for the new product (state of nature, market uncertainty)

• problems for market allocation processes

• too low levels of production and/or investment

Unpriced actions of one agent affect profits of another

• Makes it hard for companies to appropriate the returns of their investment in R&D

• Externalities are a central problem for the provision of public goods

• Providers of public goods are likely to create many externalities —-> markets may not provide the right incentives to encourage their production

• Agents are able to use new knowledge generated by other agents relatively costlessly

  • —> Social rate of return of a discovery may exceed private rate of return

  • —> Threatens theability of innovators to realize a reasonable rate of return on innovation and drive a ‘wedge’ between private and social rates of return

• Public policy intervention!

• Discovery

  • recognition that something exists which will not automatically be revealed by events

• Foreknowledge

  • advance knowledge that something will happen

• Horizontal strategies

  • Generally applied directly to the market where the failure occurs

• Vertical strategies

  • Can be applied to upstream supplier markets or downstream user markets, directly affecting supply and demand facing innovators

The analysis of where

• scarce factors relevant for the production of knowledge

• are distributed among producers

• to generate innovation as output

• A public good that is not limited geographically

• Examples:

  • international economic stability,

  • international security,

  • international environment,

  • international humanitarian,

  • and knowledge

• Patents and copyright protection to increase the degree of appropriability

• Direct government support in terms of financial support or tax benefits

• Positive effects of patents are:

  • Increase the appropriability of returns on R&D

  • Self-selection mechanism which solves the problem of moral hazard

• Drawbacks of patents are:

  • Trade-off between dynamic efficiency

    • benefits from greater innovative activity

  • vs static inefficiency

    • losses from underutilization of knowledge/underproduction of patented good

  • Abuse of monopoly especially in countries without anti-trust authorities