Innovation Policy and the Economy, Volume 11

inexorably towards market failures - and particularly to idea underproduction in the absence of
policy intervention. To frame the analysis of science policy to follow, first consider two core
features of ideas, the market failures they cause, and the particular government institutions that
exist - and must be well designed - to combat them.

First, ideas are typically harder to create than to copy. More specifically, the production
of new ideas involves fixed costs to conceive, develop, demonstrate, and market the idea. If,
once this hard work is done, entrants can freely adopt the creation, then the resulting competition
will reduce profits from the new idea. This ex-post competition can kill the incentive to produce
the idea in the first place, especially to the extent that the innovator cannot recoup the fixed costs
of their investment. Intellectual property law, especially patents, serves to limit this ex-post
dissipation of profits, thus maintaining incentives for the technological advances that drive
economic growth. Patent-granting organizations, such as the USPTO, thus play essential roles in
creating well constructed property rights for new ideas.

Second, ideas are often cumulative, building one upon another. To the extent that the
creator of the initial idea cannot capture the returns to future creativity that the idea unleashes,
the incentive to create an idea may again be insufficiently strong. Patent law also plays a role
here: by forcing disclosure of the idea, other innovators are more able to build upon it. But this
market failure may be particularly acute for basic research, where new ideas may have little
commercial possibility directly but underpin hosts of downstream, commercial innovations.
Here, direct government support for basic research (through the university system, government
laboratories, and through institutions like the NIH and NSF) may thus also be critical to
sustaining idea production and, ultimately, economic growth. In effect, because basic research
may provide little direct commercial payoff, the enterprise of basic research - including the
researchers themselves - rely importantly on subsidies from public sources.

Given this reasoning, we can consider three key aspects of science policy that the
changing nature of science bears especially upon.

1. Entry. Scientific and technical progress ultimately relies on the entry of talented
individuals into scientific careers. To the extent that markets alone do not create

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