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Chapter 13: Q.9 (page 316)

In what ways do company investments in research and development create positive externalities?

Short Answer

Expert verified

Businesses that did not pay the development costs can benefit from new technologies.

Step by step solution

01

Content Introduction

Market competitiveness motivates corporations to invest in research and development of new products because they may make more money by inventing a way to create items more cheaply or with attributes that consumers want.

02

Content Explanation

When a firm builds a factory or buys equipment, it reaps all of the financial benefits that come with the investment. However, when a firm invests in modern technology, the private benefits it gains, or profits, are only a small part of the overall social benefits. The social worth of all positive externalities of a new concept or product, whether experienced by other firms or society as a whole, as well as the private advantages earned by the corporation that created modern technology, is accounted for by the social value of the new idea or commodity.

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Most popular questions from this chapter

HighFlyer Airlines wants to build new airplanes with greatly increased cabin space. This will allow HighFlyer Airlines to give passengers more comfort and sell more tickets at a higher price. However, redesigning the cabin means rethinking many other elements of the airplane as well, like engine and luggage placement, and the most efficient shape of the plane for moving through the air. HighFlyer Airlines has developed a list of possible methods to increase cabin space, along with estimates of how these approaches would affect the plane's operating costs and ticket sales. Based on these estimates, Table 13.5 shows the value of R&D projects that provide at least a certain private rate of return. Column 1 = Private Rate of Return. Column 2 = Value of R&D Projects that Return at Least the Private Rate of Return to HighFlyer Airlines. Use the data to answer the following questions.

Private rate of returnValue of R&D
12%\(100
10%\)200
8%\(300
6%\)400
4%$500

a. If the opportunity cost of financial capital for HighFlyer Airlines is 6%, how much should the firm invest in R&D?

b. Assume that the social rate of return for R&D is an additional 2% on top of the private return; that is, an R&D investment that had a 7% private return to HighFlyer Airlines would have a 9% social return. How much investment is socially optimal at the 6% interest rate?

Name two public goods and explain why they are public goods.

Becky and Sarah are sisters who share a room. Their room can easily get messy, and their parents are always telling them to tidy it. Here are the costs and benefits to both Becky and Sarah, of taking the time to clean their room: If both Becky and Sarah clean, they each spends two hours and get a clean room. If Becky decides not to clean and Sarah does all the cleaning, then Sarah spends 10 hours cleaning (Becky spends 0) but Sarah is exhausted. The same would occur for Becky if Sarah decided not to clean—Becky spends 10 hours and becomes exhausted. If both girls decide not to clean, they both have a dirty room.

a. What is the best outcome for Becky and Sarah? What is the worst outcome? (It would help you to construct a prisoner’s dilemma table.)

b. Unfortunately, we know that the optimal outcome will most likely not happen, and that the sisters probably will choose the worst one instead. Explain what it is about Becky’s and Sarah’s reasoning that will lead them both to choose the worst outcome.

What is the free rider problem?

Are the following goods non-rival in consumption?

a. slice of pizza

b. laptop computer

c. public radio

d. ice cream cone
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