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Chapter Review Chapter 20: Technological Change

  1. Ideas are different from the goods envisioned in the basic competitive model—they are nonrivalrous.
  2. Industries in which technological change is important are almost necessarily imperfectly competitive. Patents are one way the government makes it difficult and costly for firms to copy the technological innovations of others. A firm with a patent will have a government-enforced monopoly. The expenditures on R & D are fixed costs; when they are large, there are likely to be few firms in the industry, and price competition is more likely to be limited.
  3. Long-lasting and broad patents reduce competition (at least in the short run), but provide greater incentives to innovate. Excessively broad patent coverage may discourage follow-on innovation.
  4. Learning by doing, which provides companies (or countries) that begin making a product first an advantage over all later entrants in lowering costs of production, may be a source of technological advantage.
  5. Research and development generally provides positive externalities to consumers and other firms. But since the innovating firm cannot capture all the social benefits from its invention, it will tend to invest less than a socially optimal amount.
  6. Basic research has both of the main properties of a public good: it is difficult to exclude others from the benefits of the research, and the marginal cost of an additional person making use of the new idea is zero.
  7. A number of governmental policies encourage technological advance: patents, direct spending on research, tax incentives to encourage corporate R & D, temporary protection from technologically advanced foreign competitors, and the relaxation of antitrust laws to allow potential competitors to work together on research projects.
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