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

External benefits (or positive externalities) are benefits that accrue to parties not directly involved in an economic transaction or activity. In the context of R&D, external benefits can include advancements in knowledge, technology, or innovation that benefit others in society, even if they did not invest in the R&D themselves. These benefits are often not captured by the market price and, therefore, may not be taken into account when making investment decisions.

Firms and individuals invest in R&D to develop new products, technologies, or processes that will provide a competitive advantage or increase the value of their businesses. When considering an investment in R&D, the potential investor will compare the expected costs (such as R&D expenses, interest on loans, and opportunity cost of capital) against the expected benefits (such as increased revenues, lower costs, or more profitable business opportunities).

When external benefits are present, the social value of the R&D investment can be greater than the private value that accrues to the individual investor. This is because the benefits to society may be much larger than the benefits captured by the individual investor, leading to potential underinvestment in R&D.

When there are external benefits, the total benefits from investing in R&D (including both private and social benefits) are higher than without external benefits. This higher total benefit can potentially justify a higher level of investment in R&D. However, since the market may not fully account for the external benefits, there may not be enough incentives for investors to invest at the socially optimal level. On the other hand, without external benefits, the only benefits considered will be the direct private benefits to the investor. In this case, the potential investor will be only focused on their profit and may be less likely to invest in R&D projects that are beneficial for society. Consequently, the demand for borrowing and investing in R&D will be lower compared to the situation when external benefits exist.

In conclusion, the demand for borrowing and investing in R&D will be lower if there are no external benefits. Without external benefits, investors have fewer incentives to invest in projects that create positive impacts for society, and they will only focus on projects that directly benefit their businesses.