13.1 Flashcards
(12 cards)
How does market competition drive technological innovation?
By allowing firms to reduce production costs and create desirable new products.
What are private benefits in the context of new technology?
Benefits received by the individual or firm investing in new technology.
What are social benefits of new technology?
Includes private benefits plus positive spillovers to others.
What are positive externalities?
Beneficial effects on third parties from new technology.
Why may firms underinvest in R&D?
Because they cannot capture all social benefits.
Provide an example of underinvestment in R&D.
A drug company with an 8% borrowing cost invests less than society’s optimal level due to spillover benefits.
What is a solution to encourage optimal investment in R&D?
Policies that help firms capture more social benefits.
What is the impact of education on productivity and earnings?
Education requires upfront costs but increases future productivity and earnings.
What is the private rate of return on college education in the U.S.?
Approximately 10-15%.
What are some social benefits of education?
Better public health and lower crime rates.
How can governments encourage investment in positive externalities?
By ensuring those creating positive externalities receive a greater share of benefits.
Provide an example of a public policy response to positive externalities.
Flu shot subsidies to increase vaccinations to the socially optimal level.
