method for doing so. Even a general explanation of the basis for achieving the observable result jeopardizes the exclusivity of its possession, for knowing that something can be done is an important step toward discovering how it may be done.

The dual properties of nonrival usage and costly exclusion of others from possession define what is meant by a pure public good. The term "public good" does not imply that such a commodity cannot be supplied privately, nor does it mean that government must produce it. But competitive market processes will not do an efficient job of allocating resources for producing and distributing pure public goods, because such markets work well when the incremental costs and benefits of using a commodity are assigned to the users.

Capturing the Benefits of Research Investments

One may see the problem posed by the public goods characteristics of knowledge by asking how ideas can be traded in competitive markets, except by having aspects of their nature and significance disclosed before the transactions are consummated. Rational buyers of ideas, no less than buyers of coal, and of fish and chips, first want to know something about what they will be getting for their money. Even if the exchange fell through, the potential purchaser would enjoy (without paying) some benefits from what economists refer to as transactional spillovers. These occur because there may be significant commercial advantages from acquiring even general information about the nature of a discovery, or an invention—especially one that a reputable seller has thought it worthwhile to bring to the attention of people engaged in a particular line of business.

This analysis leads to the conclusion that the findings of scientific research, being new knowledge, would be seriously undervalued were they sold directly through perfectly competitive markets. Some degree of exclusivity of possession of the economic benefits derived from ideas is necessary if the creators of new knowledge are to derive any profit from their activities under a capitalist market system. Firms can protect their knowledge either by seeking patent or copyright protection or by trying to keep it secret. Patents and copyrights provide legally enforceable means of protecting knowledge, but they require that inventors publicly disclose the workings of their inventions (e.g., through a patent application), enabling others to learn from their work and to find alternative means of achieving the same end (i.e., reverse engineering a particular device). Keeping a trade secret (if done effectively) avoids public disclosure, but offers little means for legal resource if others learn the secret (unless they use unlawful means to do so). Industries vary in the degree to which firms prefer to seek intellectual property protection versus keep-



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