Intellectual Property Patents, Copyrights, and
Other Protectionist
Barriers
CEPR Basic Economics Seminar
Dean Baker
November 17, 2005
The High Cost of Intellectual
Property
• Patents and Copyrights: What they are
and why we have them
• The Basic Economics of Patents and
Copyrights – Software
• Patents in Prescription Drugs
• Copyrights in the Internet Age
• Alternatives to Patents
• Alternatives to Copyrights
The Economics of Protectionism
Short-term efficiency loss, dynamic efficiency gain – incentives to innovate
• Deadweight loss – same logic as trade protection, but far
greater
• Monopoly rents – advertising, lobbying, legal tactics, etc.
Patents as Public Policy, not Rights
• The Constitution on patents (Section 8,
Clause 8):
To promote the Progress of Science and useful Arts,
by securing for limited Times to Authors and
Inventors the exclusive Right to their respective
Writings and Discoveries
• Patents and copyrights are a mechanism the
government uses to advance a public goal –
they are not part of the market; they are not a
right.
Patents in Prescription Drugs
• 2005 spending = $220 billion
• Competitive price = approx. $70 billion
• Cost of drug patents in 2005 = approx. $150
billion
• The industry claims $40 billion in domestic
research
• Costs are projected to rise to $500 billion by
2014, almost half paid by the public
sector
Distortions Created by
Prescription Drug Patents
• Drugs are expensive – people
cannot afford them (patent
protected AIDS drugs $10,000 a
year, free market version $200)
• Price discrimination – gaming
• Counterfeiting
Perverse Incentives Created by
Prescription Drug Patents
• Copycat drugs – according to industry data, 2/3 of
research spending goes to copycat drugs. We spend $10
in higher drug prices for every dollar spent researching
breakthrough drugs
• Secrecy – the industry only makes available the
information it is required to make public to get patents
and FDA approval. They want to maximize their benefit
from research, not their rivals
• Withholding negative research findings (e.g., Vioxx)
• No incentive to research non-patentable cures and
treatments (e.g., nutrition, exercise, environment, etc.)
• Lobbying for public payments for drugs,
legal harassment of generics, etc.
Copyrights in the Internet Age
• Logic of copyright – incentives, monopoly for
limited periods – continual extensions of
length – the Mickey Mouse Law.
• Copyright enforcement in the Internet Age –
costless duplication
• Software locks, spyware, propaganda classes
• International enforcement problems
Alternative to Drug Patents:
Publicly Financed Research
• National Institutes of Health get $30 billion a year
• The Free Market Drug Act (FDMA)
1. $30 billion for 10 competing research companies
2. All research findings are placed in the public domain – all drugs
sold as generics
3. All results published and made publicly available
4. $1 billion prize fund to reward outstanding breakthroughs
5. Industry can still get patents and compete with drugs developed
through FDMA
• Feasibility – federal government is projected to spend
$200 billion on drugs through 2014; seniors will pay
more with Medicare drug benefit than they did
in 2000 without
Alternatives to Software Patents
• Publicly financed software development
corporations – all software is put in the
public domain – “Opening Doors and
Smashing Windows”
• $2 billion a year could save $30 billion
in lower computer and software prices.
Alternatives to Copyright
Support for Textbooks
• Publicly financed textbook development
corporations
• All textbooks in the public domain – available
costlessly over the Internet (potential savings
of $12 billion a year)
• Professors could mix and match chapters
from textbooks – better teaching
• Textbooks could still be supported by
copyrights in competition (an alternative
form of subsidy)
Alternatives to Copyright Support for
Creative and Artistic Work
• Recorded Music, Movies, Books – The Artistic Freedom
Voucher
• Modeled on the charitable tax deduction, but it’s a credit
($75)
• Recipients (creative workers or intermediaries) must file in
the same way that religious or 501(c)(3)s file
• Recipients cannot receive copyright protection (they get a
choice of subsidy)
• Self-enforcing – an AFV recipient cannot get their
copyrights enforced by the courts
• A $75 per taxpayer credit would support 300,000
musicians, writers, actors at $50,000 a year
• A vast amount of material would be available
worldwide at zero cost over the Internet
Conclusion
• Patents and copyrights are forms of
government intervention which are intended
to serve a public purpose
• There are enormous inefficiencies associated
with patents and copyrights
• Patents and copyrights encourage antisocial
rent-seeking behavior
• There are alternatives; they must be debated
Reading List
• Baker, D. 2005. “Opening Doors and Smashing Windows:
Alternative Measures for Funding Software Development,”
Washington, D.C.: Center for Economic and Policy Research
[http://www.cepr.net/publications/windows_2005_10.pdf].
• Baker, D. 2005. “Are Copyrights a Textbook Scam? Alternatives to
Financing Textbook Production in the 21st Century,” Washington,
D.C.: Center for Economic and Policy Research
[http://www.cepr.net/publications/textbook_2005_09.pdf].
• Baker, D. 2004. “Financing Drug Research: What Are the Issues?”
Washington, D.C.: Center for Economic and Policy Research
[http://www.cepr.net/publications/intellectual_property_2004_11.
pdf].
• Baker, D. 2003. “The Artistic Freedom Voucher: An Internet Age
Alternative to Copyrights,” Washington, D.C.: Center for Economic
and Policy Research
[http://www.cepr.net/publications/ip_2003_11.pdf].
Intellectual Property - Patents,
Copyrights, and Other
Protectionist Barriers
Dean Baker
baker@cepr.net
Center for Economic and Policy Research
www.cepr.net