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Market Failure and Government Intervention

incentives to invent, which traditionally are provided by patents.  As the process of invention is moved further from firms and as the fruits of invention are shared, it is not certain that firms will maintain their individual inventive capabilities.  Nevertheless, without such cross licensing, joint ventures for invention, and other government aid; there might not be any American semiconductor firms at all, not to mention firms that would maintain their inventive capability.

A problem of close coordination on invention is the inevitable spillover of coordination into the realm of prices and output.  When firms have cross licensed patents to each other, they have occasionally used the opportunity to coordinate pricing, production and other matters as well.6

A further problem occurs when patents are used to give the firm market power over other products.  Antitrust agencies and the courts have restricted the use of patents by some firms and have severely limited the use of patents when their effects have spilled over into other markets.7

In spite of all of the problems of the patent system, economists do not have the answer for a better system and the patent system probably will not be replaced.  Therefore, firms must carefully weigh the strategic consequences of the use of the patent system.

B.  Externalities and Side Effects

Government policies can have their own externalities and side effects which may not always be desirable.  When the Soviet Union fell apart in the early 1990s it became apparent that the Soviet government had permitted massive pollution and destruction of its territories.  The American government itself has been a major polluter.  Oversight of the government by the government itself produces an obvious conflict of interest.

C.  Economic Distortions

Government policy can also lead to inefficiencies.  The government has been very slow to realize the sophisticated workings of markets.  By imposing rules, a government agency can create surpluses or shortages.  Either type of market disequilibrium results in waste.

Once again it is instructive to look at the example of the Soviet Union before it fell.  As American director of the U.S. - U.S.S.R. Trade and Economic Council, Inc., Du Pont's Shapiro had become acquainted with a classic example of the inefficiencies of government:

It's much worse in Russia, because the only structure in their society is government.  All the VIPs are government officials.  The bureaucracy, the rules, the regulations, the paperwork- why, it's simply overwhelming.  To paraphrase an old Churchill line about democracy, "It's got a lot of defects; it just happens to be better than anything else we can come up with.'7

    (  Shook, op. cit. p. 225

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