Intellectual Property, Complex Externalities, and the Knowledge Commons

Forthcoming, Public Choice

38 Pages Posted: 27 Aug 2023

See all articles by Nathan P. Goodman

Nathan P. Goodman

George Mason University - Mercatus Center

Otto Lehto

New York University

Date Written: August 22, 2023


Intellectual property (IP) can internalize positive externalities associated with the creation and discovery of ideas, thereby increasing investment in efforts to create and discover ideas. However, IP law also causes negative externalities. Strict IP rights raise the transaction costs associated with consuming and building on existing ideas. This causes a tragedy of the anticommons, in which valuable resources are underused and underdeveloped. By disincentivizing creative projects that build on existing ideas, IP protection, even if it increases original innovation, can inadvertently reduce the rate of iterative innovation. The net effect of IP law on innovation and welfare depends on the relative magnitude of these positive and negative externalities. We argue that the current regime probably suffers from excessive, and excessively rigid, IP protection. This motivates the search for institutional alternatives and complements. We suggest that a monocentric IP rights regime may not be the only, or the most efficient, way to internalize the positive externalities of innovation. The knowledge economy supports the emergence of diverse, polycentric forms of bottom-up self-governance, both market and community led, that entail the citizen coproduction of the norms and practices of intellectual creation and discovery.

Keywords: innovation, IP, externalities, transaction costs, law and economics, knowledge commons, polycentricity

JEL Classification: D62, D72, O34

Suggested Citation

Goodman, Nathan and Lehto, Otto, Intellectual Property, Complex Externalities, and the Knowledge Commons (August 22, 2023). Forthcoming, Public Choice, Available at SSRN:

Nathan Goodman (Contact Author)

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

Otto Lehto

New York University ( email )

40 Washington Square South
New York, NY 10012-1099
United States

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