In short, history informs us that there are many incentive systems other than intellectual property. Some of these are embodied in our own public institutions, such as the National Science Foundation and the National Institutes of Health — a fact that we often forget, and certainly do not emphasize in the current climate where even publicly funded discoveries are subject to intellectual property.
Something that everyone should know is that about half of research and development is funded by public sponsors. If you pull up basic raw data from the Organisation for Economic Cooperation and Development Web site, 2 you will find that about one-third of U.S. research and development is federally funded. In other countries, which devote less money to military expenditures, a higher fraction of research and development is funded by the government. In Latin America, it is well over half. In most European countries it is a little under half. The fraction funded by taxpayers is not trivial anywhere in the world. However, the question of public/private domain is not just who funds the research, but whether the discoveries are put in the public domain. Increasingly, even the discoveries that are publicly funded are restricted by intellectual property, e.g., the many discoveries made in national laboratories funded by the Department of Energy.
Wrong answer number two is that “intellectual property rewards inventors, and doesn't hurt users provided it is licensed.” It is true that intellectual property rewards inventors, and may even be an important engine of growth and of invention. But, as I have just pointed out, there are plenty of alternatives. This is not a definitive answer. And the second part of this statement, that it doesn't hurt users provided it is licensed, is misleading. It is important to notice that, even if licensed, intellectual property still creates deadweight loss, including for scientific research tools.
A license price is a price like any other. The licensor makes profit by licensing at a proprietary price. Such a price excludes users; else the licensor could probably increase profit by increasing the price. At a higher price, some users will be retained, and the additional profit received from the retained users will outweigh the profit lost from those that refuse the license. Thus, distributing the use of a research tool by licensing instead of putting it in the public domain will reduce its use just as any other monopoly price reduces use. This may seem obvious to you, but wrong answer number two is a common justification. While licensing certainly puts the intellectual property in use, it does not solve the problem of deadweight loss.
The argument about deadweight loss is illustrated by Figure 3-1, which shows the proprietary price. On the horizontal axis, we have arrayed all the users by their willingness to pay. If the proprietor charges a single price, then all the users arrayed to the left, for whom willingness to pay is higher than the price, will take a license. Each is getting some surplus despite the proprietary price, because each is willing to pay more than he actually has to pay. On the other hand, the proprietary license price is excluding all the other users to the right. That is precisely the social burden of intellectual property.
There is one small caveat to this story, namely, that price discrimination can cure the deadweight loss that arises from charging a single price to all users or potential users. If the proprietor could charge each user exactly his willingness to pay, then there is no reason to exclude, because the way to maximize profit is to embrace all the users within a system of discriminatory pricing. Although no user is excluded, the proprietor gets the entire surplus.
I mention the price discrimination caveat because it is a deeply subversive argument. It implies that there is nothing wrong with intellectual property. The argument has appeared in at least one court opinion, ProCD, a Seventh Circuit opinion. 3 If you believed that perfect price discrimination was possible or likely in most cases, it would remove the basic reason that intellectual property is a burden on society, namely, deadweight loss, and removes any argument for reining it in. I believe the problem of excluding users is fundamental and basic, so I would not want the argument to be subverted in that way. Price discrimination can be very difficult, at least the perfect price discrimination that underlies this argument. In my view, we should take seriously the deadweight loss due to intellectual property, and take steps to preserve the public domain.
Wrong answer number three is that “the private sector is more efficient than the public sector.” First of all, what does this mean? The public sector does not make inventions. Scientists make inventions. Most public sector
2 See www.oecd.org/pdf/M00026000/M00026476.pdf for additional information.
3 ProCD v. Zeidenberg, 8 F.3d. 1447 (7th Cir. 1996).