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In Economic Growth and particularly dynamic optimization. My professor taught us that an intertemporal allocation is a dynamic optimum(Pareto Optimum) only if(necessary condition) at any given instance it is a stationary(instant, contemporary) optimum.

I questioned about patents. We are sacrificing the present for R&D. We are creating a monopoly to give incentives for R&D. So obviously it cannot be at present, instantly pareto optimal. Nonetheless couldn't patents help? Since probably they give incentives for R&D?

The professor replied saying that this is exactly why some researchers in Industrial Organization defy, question patents and their benefits.

Could pharmaceuticals work just as well or even better with no patents? In work just as well I mean the intensity of the incentives for R&D.

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  • $\begingroup$ Your professor's statement depends on the underlying model. I think both of you have different models in mind. The question also seems a bit blurred. The idea behind patents is that you offer a firm monopoly rents for some time so that they have an incentive to invest into R&D. This is not Pareto-efficient. It would be welfare-improving if the firm is forced to invest and afterwards has to offer the good at marginal cost. In practice, you cannot force the firm to make losses, but patents can be a second-best alternative, not first-best. $\endgroup$ – Bayesian May 31 at 19:33
  • $\begingroup$ @Bayesian Is it really not Pareto-Efficient? Is one actually sacrificing the present and near future when creating patents? Sure one is creating a monopoly but they are most probably lowering the costs, or creating a new market. Even a monopoly is strictly preferable than no market. Every participating agent is better off. Chemotherapies and patented drugs are expensive still most people prefer to have the option of a patented drug than no drug. We indeed have different models in mind I asked for a reference. $\endgroup$ – George Ntoulos May 31 at 19:49
  • $\begingroup$ I am not saying that patents are not welfare-improving. I am simply saying that they may only be constrained-efficient. You could get an even larger welfare when you force the firm to offer the good at marginal cost. Since there are reasonable constraints that this first-best is not achievable, patents may (depending on the model) be second-best. $\endgroup$ – Bayesian May 31 at 20:13
  • $\begingroup$ @Bayesian You can potentially force the firm to offer any good at any price. The problem is discovering the marginal cost and forcing the government to issue said laws. Political economics(positive), Mechanism design, Auction theory, Social Choice, Contract Theory even Econometrics are all involved. And simply welfare(utility) is never a quantintative quantity(maths). If you use some money like structure to measure it it becames quantintative. Otherwise It is purely ordered. The monopolist is actually in a worse position with perfect competition. Only society as a whole and consumers benefit. $\endgroup$ – George Ntoulos May 31 at 20:47
  • $\begingroup$ @Bayesian How could we discover the marginal cost and force the government to isse the law for the firm to provide at that price. How could we even do so optimally? It reminds me of Barro-Gordon. You just cannot(should not) cheat. Are there any reliable sources that deal with Patents and Dynamic Optimazation and conclude that Patents are not the Optimum. If the first best is not available it is not even a choice to be considered. The second best is the optimum. $\endgroup$ – George Ntoulos Jun 10 at 19:46

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