What can government do to encourage the development of new technology?

When a firm builds a facility or buys machinery, it reaps all of the financial benefits that come with the investment. However, when a firm invests in modern technology, the private benefits it earns, or profits, are only a small portion of the total social benefits. This deters them from increasing their investment in innovation.

When it comes to technology, government policymakers must frequently strike a balance. Patents, for example, provide an incentive for innovators, but they should be limited to truly innovative ideas and issued for a limited time. Direct budget allocation for R&D, tax subsidies for R&D, intellectual property rights, and forming collaborative partnerships between universities and the private sector are just a few of the policy instruments available to the government for accelerating the amount of return on modern technology and enabling its development.