Rethinking the Rationales for Funding and Governance
New Horizons in the Economics of Innovation series
Edited by Aldo Geuna, Ammon J. Salter and W. Edward Steinmueller
Chapter 10: Funding Basic Research: When is Public Finance Preferable to Attainable ‘Club Goods’ Solutions?
10. Funding basic research: when is public ﬁnance preferable to attainable ‘club goods’ solutions? G.M. Peter Swann 1 INTRODUCTION One of the most common arguments for public funding of basic research focuses on externalities. The funder of basic research cannot capture all the beneﬁts from that research and some of these spill over to others. As a consequence, there is a risk that some socially viable projects (where social beneﬁt exceeds cost) will not be funded, because the cost exceeds the private beneﬁt to the funder. Public funding aims to ﬁll that gap. Few economists have questioned this justiﬁcation for public funding of basic research, because basic research is seen as one of the purest forms of public good. It is recognized, of course, that the club goods solution has a role for the funding of some non-basic research activity. In those areas a common ‘club goods’ response to the externality argument is to ask, why can the diverse beneﬁciaries from a project not form a club to fund it? If a suﬃcient number join together such that their joint beneﬁts exceed cost then the socially viable project will be funded – even if the funding club does not capture all the beneﬁts. In short, the club solution is to internalize (at least some of) the externalities. The club goods approach seems to be attracting ever more interest in policy circles as an alternative to public funding in some non-basic areas – for example,...
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