An Economic Approach
Edited by Jaume Puig-Junoy
Chapter 2: Incentives for innovation in the pharmaceutical market
P. Ibern Regàs INTRODUCTION The production of goods and services requires technical information, that is, the necessary knowledge for the production process. Information is an economic good in its own right with characteristics that differentiate it from other goods, and also a differential factor for businesses in an industrial sector. The first unique characteristic has to do with how information is produced. As Arrow points out,1 unlike with other goods, once we have produced technical information we can use it continuously for the production process, but the reproduction of the same process of obtaining technical information adds nothing new. The second characteristic has to do with its use. Once technical information has been obtained it can be used by others, even though the original owner still possesses it. The property rights on information are difficult to define. Patents were developed in order to induce an artificial shortage, with the aim of creating incentives to acquire information. Arrow also states that these intellectual property rights not only entail inefficiencies but at the same time can only offer partial protection. Economic growth ultimately depends on the production of new ideas, yet a competitive market is unable to offer suitable incentives for the production of such ideas.2 Patents are not the only mechanism that society has developed to meet this need for new ideas; governments have attempted to promote the production of innovation by means of public subsidies. However, both these instruments give rise to inefficiencies, as we will see below....
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