Answer to Question #253988 in Economics of Enterprise for fajar

Question

Economic studies have found that the private rate of
return on inventions is typically as low as one-third of
the social return. Explain this fi nding in terms of the
economics of innovation

Answer 1

This is due to positive externalities of new technology. The innovator does not enjoy all the benefits since the society also benefits. For instance, if a firm invests in new technology, the private benefits or the profits that the firm will receive are only a part of the overall social benefits. The social benefits of an innovation accounts for all benefits of the new innovation whether enjoyed by the firm or society, as well as the private benefits achieved by the firm. Therefore positive externalities are beneficial spillovers to third parties.