Assume the graph below represents the overall market demand for a patented presc

Question

Assume the graph below represents the overall market demand for a patented prescription drug together with the firm-level marginal cost and average cost functions for producing the drug. Assume these cost curves do not reflect R&D costs of developing this drug, but only reflect production costs of the drug once the formula for it is known. (Note: the diagram assumes that in the output range from 250-400 thousand MC =ATC = $20). Rising MC at Q>400,000 increases ATC.)

Why does the US government create monopoly power through the patent system , given the net efficiency loss from monopoly power? Explain in a paragraph.

Explanation / Answer

The patent system promoted by the US government, encourages innovation and creativity. The patent is awarded to those firms or individuals who spend a huge amount of resources to get a formula, technology or unique new process with the risk of failure before beginning the research. Therefore, to encourage these innovations and spending on research & development, the US government creates patent system. Further, it brings comparative advantages to the USA economy as it gives competitive advantage in the international market. Besides, the promotion of the patent system, encourages the private property rights and people are encouraged towards the innovation, a precursor of the growth and expansion of the economy.

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