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

Intellectual Property - Patents, Copyrights, and Other Protectionist Barriers Dean Baker Center for Economic and Policy Research