Patent Law's Externality Asymmetry

43 Cardozo L. Rev. (forthcoming 2022)

50 Pages Posted: 18 Oct 2021

See all articles by Peter Lee

Peter Lee

University of California, Davis - School of Law

Date Written: October 17, 2021


Technologies such as social media, autonomous vehicles, and “big data” analytics generate enormous benefits for society, but they also create substantial harms. Social media networks spread misinformation, autonomous vehicles threaten driving jobs, and predictive policing based on big data can lead to unreasonable searches and seizures. One of the most significant ways that technology impacts society is by producing externalities—external benefits and costs that a decisionmaker (such as an inventor) imposes on third parties without charge or compensation. Externalities can cause inefficient resource allocation, and the classic remedy is to “internalize” such externalities by holding decisionmakers more accountable for the benefits and costs of their actions. Patents, which confer exclusive rights on new inventions, enable inventors to internalize a share of positive externalities from technology, thus maintaining incentives to invent. However, inventions also produce harms, and how patents treat negative externalities from new technologies has been largely overlooked. This Article is the first to extensively examine this issue. It argues that while patents internalize positive externalities associated with innovation, they do surprisingly little to internalize negative externalities. This Article refers to this underappreciated dynamic as patent law’s externality asymmetry.

Patent law’s externality asymmetry is particularly striking when comparing patents to physical property rights. Foundational economic theory holds that property rights (including patents) emerge to internalize externalities. However, physical property rights internalize negative externalities in several ways that are inapplicable to patents. Patents do not internalize negative externalities associated with the tragedy of the commons, and they encourage rapid exploitation of technologies rather than their judicious use. Due to high transaction costs, patents do not facilitate efficiency-maximizing negotiations between patentees and people harmed by their inventions. Finally, patents create no duties for inventors to mitigate harms from their patented technologies. Turning to normative considerations, this Article argues that patent law’s externality asymmetry is highly problematic because it undermines efficiency, distributive equity, and fairness. It proposes modest reforms to patent law and a more expansive approach to innovation law and policy to help correct these deficiencies.

Keywords: patent law, intellectual property, externalities, spillovers, law and economics, Demsetz, Facebook, filter bubble, autonomous vehicles, AI, automation, predictive policing, property rights in land, tragedy of the commons, transaction costs, nuisance, efficiency

JEL Classification: D61, D62, D63, O31, O32, O34, P14, Q24

Suggested Citation

Lee, Peter, Patent Law's Externality Asymmetry (October 17, 2021). 43 Cardozo L. Rev. (forthcoming 2022), Available at SSRN:

Peter Lee (Contact Author)

University of California, Davis - School of Law ( email )

Martin Luther King, Jr. Hall
Davis, CA CA 95616-5201
United States

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