The Marginal Cost Controversy in Intellectual Property
20 Pages Posted: 8 Feb 2008
In 1938, Harold Hotelling argued that the optimum of the general welfare corresponds to the sale of everything at marginal cost and that therefore government revenues should be used to subsidize all industries having large fixed costs. Ronald Coase's 1946 article The Marginal Cost Controversy set forth a rejoinder to the Hotelling thesis, concluding that the proposed subsidies would bring about a maldistribution of the factors of production, a maldistribution of income and probably a loss similar to that which the scheme was designed to avoid. While the very success of Coase's critique has led to the entire marginal cost controversy being largely forgotten today, a number of scholars have recently proposed that government-funded prizes or awards should be used to subsidize the fixed costs of intellectual property, with the goal of achieving marginal cost pricing for all intellectual property. This Article demonstrates that such proposals are subject to many of the same objections that Coase first raised against Hotelling's proposed subsidies. Still, the reprise of the marginal cost controversy in the intellectual property field is not a complete replay of history. Intellectual property does possess some unique features that differentiate it from Hotelling's targets for public subsidies, but those distinctions do not necessarily make it easier to subsidize intellectual property. Any subsidy system for intellectual property is therefore unlikely to be a simple panacea, and proposals for such systems should be approached cautiously, with a full understanding of the scope of the problem and an appreciation of the ideas of the past.
Keywords: innovation, prizes, subsidies, patents, intellectual property, marginal cost, Coase
JEL Classification: K00, O34, O31, B20, H40, H41, H42, I10, K23
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