---
title: "Economics of science"
chunk: 2/2
source: "https://en.wikipedia.org/wiki/Economics_of_science"
category: "reference"
tags: "science, encyclopedia"
date_saved: "2026-05-05T04:36:30.029864+00:00"
instance: "kb-cron"
---

=== The patent system ===
In the United States, the Patent and Trademark Office issues patents that give the holder of the patent exclusive, defined property rights to their product for 20 years. From an economic perspective, the value of the patent is that it increases the marginal benefit of the firm that is producing the scientific knowledge. To graphically display this concept, the accompanying figure depicts the marginal benefit and marginal cost curves of a firm in the market for science. The vertical axis displays the marginal cost and marginal benefit of each additional dollar spent on research and development. The horizontal axis displays the amount of money spent on research and development in total. Research and development is assumed to have diminishing returns. For simplicity's sake, all curves are assumed to be linear, and the marginal cost curve is assumed to be constant. A firm will maximize their profits by producing where marginal cost intersects marginal benefit. In the absence of any government intervention, the firm will produce where at RD0, where private marginal benefit (MB0) intersects MC. However, if scientific knowledge is assumed to be a public good, then RD0 is too low a quantity to satisfy the social need. The optimal amount of R&D is at RD1. The value of the introduction of the patent system is that it allows the marginal benefit curve for the firm to shift upward to MB1 so that the private benefit to the firm now produces the socially optimal quantity. The additional revenue is collected from society, as society now pays higher prices for the knowledge given the monopoly power of the producing firm.
In practice, patent law has been correlated with increased R&D expenditure, indicating that this form of government intervention is in fact incentivizing production. However, this type of government intervention does not allow particularly precise targeting of the optimal level of R&D production, and several economists argue that the benefit of 20 years of monopoly power is too high. This argument has particular relevance to current debates regarding the production of life-saving pharmaceuticals.

=== Tax incentives ===
In 1954, the Internal Revenue Service incorporated an exemption for research costs such that firms could have research costs deducted from their yearly taxes. From an economic perspective, the value of the tax incentive is that it decreases the marginal cost of the firm that is producing the scientific knowledge. To graphically display this concept, the accompanying figure depicts the marginal benefit and marginal cost curves of a firm in the market for science. The vertical axis displays the marginal cost and benefit of each additional dollar spent on research and development. The horizontal axis displays the amount of money spent on research and development in total. Research and development is assumed to have diminishing rate of return. For simplicity's sake, all curves are assumed to be linear, and the marginal cost curve is assumed to be constant. A firm will maximize their profits by producing where marginal cost intersects marginal benefit. In the absence of any government intervention, the firm will produce where at RD0, where private marginal benefit (PMB0) intersects MC. However, if scientific knowledge is assumed to be a public good, then RD0 is too low a quantity to satisfy the social need. The optimal amount of R&D is at RD1, which is where the marginal cost curve intersects the social marginal benefit (not depicted on this graph). The value of the tax incentive is that it allows the marginal cost curve for the firm to shift downward so that the private cost to the firm now produces the socially optimal quantity. The rest of the cost is now borne by society, in the form of the lost tax revenue.
Tax incentives allow slightly more precise targeting than the patent system. However, the concern still remains that tax incentives exacerbate inequality by producing financial windfalls for firms that might already be very prosperous. Furthermore, empirical studies have been limited, although a 1996 report from the Congressional Office of Technological Assessment found that for every dollar lost in tax revenue, there was a dollar increasing in private R&D spending.

== See also ==
Author-level metrics
Economics of scientific knowledge

== References ==