Knowledge spillover

For an individual, all knowledge has a cost to acquire (whether it is new or old knowledge). But unlike all other products, the price of knowledge is dependent on how many other people have the knowledge. The price of knowledge goes down when more people know it (decreasing marginal cost of knowledge). The cost of knowledge is especially high for the first person to acquire the knowledge because they had nobody to help them.

When one person’s knowledge decreases the cost of knowledge for other people this is a “knowledge spillover” (positive externality) and this is the most commonly cited market “failure” in the market for knowledge.

Common solution to the knowledge spillover: patents

Various solutions have been offered to offset the under-investment in new knowledge caused by the knowledge spillover. One solution is to give the innovator a short-term monopoly position over their idea so that they can make extra-normal monopoly profits.

This can be achieved by the government providing “patents” and therefore protecting their monopoly position. However, there are also costs of patents. These include:

* efficiency costs of monopoly;
* monopoly over ideas may reduce incentive to innovate;
* might encourage too much investment in new knowledge at the expense of capital & consumption; and
* rent-seeking, administration & compliance costs.

Non-government solutions to the knowledge spillover

* Keeping trade secrets
* First-mover advantage
* High cost of education (ie marginal cost of knowledge doesn’t decrease much)
* Driving up barriers to entry
* Different value of knowledge (ie knowledge not relevant to other people)