A Governance Framework for Intellectual Property Rights
Chapter 3: Externalities and monopolies
Consciously or unconsciously the environmental movement has relied upon welfare economics as a theoretical foundation for the following key claim: the economic system largely ignores environmental costs. Within economic theory environmental costs are usually referred to as ‘negative externalities’. Pollution is a prime example. Building upon the work of Adam Smith, the welfare economist A.C. Pigou clearly articulated the concept of externalities in his classic The Economics of Welfare. This chapter begins by discussing externalities as a source of market failure. Just as there is an intimate relationship between property rights and markets, so too there is an intimate relationship between property rights and externalities. In the physical environment context Coasian/Demsetzian reasoning is often used to argue that the internalisation of externalities through property rights (and corresponding markets) can overcome the externalities of market failure. Yet property rights entail costs, both private and public. Transactions costs are a private cost example and externality costs are an example of public costs. The latter arise from what will be termed the ‘externalities paradox’. After engaging with externalities the chapter will then turn to a discussion of monopolies with the view of revealing another type of public cost – distributional costs associated with the monopolistic characteristics of IPRs. This discussion will invoke price discrimination activities, which are often deployed by IPR holders.
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