Chapter 13: Problem 10

Will the demand for borrowing and investing in R\&D be higher or lower if there are no external benefits?

Short Answer

Expert verified

In the absence of external benefits from R&D investments, the demand for borrowing and investing in R&D is likely to be lower. This is because companies may not see a sufficient return on investment to justify these investments, leading to a lower overall demand for R&D and borrowing.

Step by step solution

Understand external benefits

External benefits occur when a party not involved in an economic transaction benefits from it. In the context of R&D, external benefits arise when the results of a company's research and innovations positively impact other companies or society as a whole.

Analyze R&D investments

When a company invests in R&D, it aims to create new products, services, or processes that will generate a return on investment. If there are external benefits, other companies and society will also benefit from these innovations, potentially leading to greater overall demand for R&D. In contrast, if there are no external benefits, companies may not see a sufficient return on investment from R&D, reducing the demand for such activities.

Examine the demand for borrowing

Companies often borrow money to finance their R&D investments. A high demand for R&D would typically translate into a high demand for borrowing to fund these investments. In the absence of external benefits, if companies see a reduced return on investment or lower demand for their innovations, this could lead to a decreased demand for borrowing.

Assess the impact of no external benefits

In a scenario with no external benefits from R&D investments, companies may be less likely to invest in R&D, as the potential return on investment would be lower. This, in turn, may lead to a lower demand for borrowing to fund such investments.

Conclusion

If there are no external benefits from R&D investments, the demand for borrowing and investing in R&D is likely to be lower. Companies may not see a sufficient return on investment to justify these investments, which would lead to a lower overall demand for R&D and borrowing.