In what ways does the market fail where science and technology are
concerned and can the government usefully address such failure

by: Henning Schmidt

This assignment will deal with the question in what ways markets for science and technology fail and how a government can address to these failures. As approach there will be first the defining of the terms used, followed by a theoretical explanation of market failure and its causes in general. The major consideration will be towards the appropriability of the returns on an innovation. From here on, the possibilities of the state to intervene and its reasons for and against it will be looked at. Then it will be concluded which measures are considered a useful addressing towards this specific kind of market failure and which not. The question behind all considerations on intervention will be how either sufficient property rights are created or lacking property rights are compensated.

Regarding “science and technology” this essay will take any activity inside of a national economy that is aimed to create knowledge of any kind as part of the consideration. It is acknowledged, that “technology” produces private goods with profit as driving incentive, whereas “science” is producing a public good, driven by the evaluation of other scientists (see Stoneman 1995 p. 4). A further distinction of both is not undertaken in this concern, as the question involves both terms and the differences are not considered to be crucial for the further considerations. The Schumpeterian approach that before an innovation as the development of an idea into a marketable product there needs to be the invention, the scientific generation of new ideas, and that an innovation ends with its diffusion is acknowledged as well (see Stoneman, 1987, pp. 8 – 9 ). In the following considerations these processes are considered given as part of the general economic activity. On markets, “property rights” are exchanged, deducted from the surrounding legal institutions, by which an economic agent controls an economic good to a certain extent (See Fritsch et al p.19, p.6). It will be shown that the basis for market failure lies within inadequate property rights for technology and also that to a certain extent, this is economically desirable.

The theoretical concept of “market failure” founds on violations of the conditions necessary for a socially optimal and efficient result in perfect competition, i.e. uncertainty, externalities and indivisibilities (See Acocella, p. 89). There is a wider consideration of reasons for market failures (see Stiglitz 1988 pp. 71 -82), but for the following considerations the three reasons as given above will be sufficient.

For science and technology, all reasons considered for market failure exist. First, there is uncertainty any research might very well not deliver the desired, thus profitable, result (see Freeman and Soete p. 242). Second, externalities occur because the output of innovation is in the first place pure information (see Stoneman pp. 92 – 93). Hence, there are third-party agents who control a variable of this economic action and benefit from it without being involved in the first place( see Fritsch et al p. 96) Third, indivisibilities occur as to the fact that every innovation is an entity of itself. (See for all three reasons Geroski in Stoneman, 1995, p.91)

As depicted above, innovation can be defined as “the development of new ideas into marketable products” (Stoneman, 1987, p. 8). This implies necessarily, that there is asymmetric information wherever there is innovation, which has major implications on any intervention by the state, as we will see later on (see Stoneman, 1995, p. 412). Despite asymmetric information, it is not possible to fully claim all returns of an innovation for an innovator.

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