Economics of Intellectual Property Rights

As the knowledge based economy grows, the questions of rights over an information and the uses of the information play a significant role in economic development. The intellectual property rights some way or the other interferes in our day to day life. The early scholars referred IP as drivers of economy while the scholars at subsequent stage kept IP in a wider concept of socioeconomic development. Out of 4 schools of IP, economics of IP is concerned with the Utilitarian theory or the maximum social welfare. There are three ways to apply this to IP policies i.e. by incentive theory, by patterns of productivity and by reducing duplication.

1. The Incentive Theory

Public good such as information are non-rivalrous in nature i.e. can be used infinite number of times and non-excludable in nature i.e. multiple parties can use it at the same time. Therefore information is most efficiently used when it is free and widely used. But if the information is freely and widely used, the creators would not get any return against the investment made in creation of that information. To overcome this incentives are created which bring in artificial restriction in the form of intellectual property rights. These IPRs bring in static inefficiencies by restricting free and wider access of information. However this inefficiency is tackled by the incentives by bringing in higher rate of innovations which ensure more and more flow of information which results in a dynamic efficiency. Therefore, IPRs aim at creating a balance between minimum static inefficiency and maximum dynamic efficiency.

However, this theory lack certain aspects. It does not take into account, the non-monetary form of incentive or prize based incentive which might ensure less static inefficiency and create a better balance. Further, it is against harmonization and denies proper flow of information or knowledge in the society. It also neglects distribution concerns of rights over IPs.

2. Patterns of Productivity

IP system relies on decentralized market signals for the determination of direction of innovations in the market. This makes it more efficiently applicable in the IP policies as if there were no such decentralized system then that would bring in a centralized signal e.g. government, and this centralized system would have to give equal opportunity to everyone by collecting data regarding all the work and then comparing it and giving the prize for it to only one of them. This process would be too inefficient for the economy. Therefore the efficiency gained by the IP system outweighs the static inefficiencies caused by it. Hence policy makers look only internally into IP Laws and ignore wider issue of socioeconomic development.

However, the conflicting concepts of ‘real property’ and ‘intellectual property’ lead to the forming of some harmful policies for the society. Rights are given to physical property as it ensures its most efficient use while the intellectual property rights do not always make the efficient use rather exploit the property to make profits. Moreover, market cannot be trusted as the best determinant of the direction of allocation of the intellectual properties.

3. Reducing Duplication

There is another theory which aims at reducing the cost that arises from duplication research or invention. If there is a large incentive on some work then many people would chase it and separately spend resources for the same goal but the prize or that would be given to only one of them. The efforts of the 2nd one go unrewarded even if he were only one day late. This results in inefficient use of innovative resources. Therefore, it argues for the existence of a government procurement as it reduces the number or entrants and thus prevents the wastage of resources over duplication of innovations.

However, if the competition is reduced to prevent duplication, it would result in low quality products and a usual delay. Also, government pricing system by allocating funds determines the value of an innovation. If the incentive allocated is too low then other entrants would have too less amount in hand which would decrease competition. If the incentive is too high, it would result in wastage of resources.


The economics of IP can be concluded by stating three things. Firstly, it is not always true that the stronger IP rights lead to higher rate of innovations. It may also create monopoly by eliminating competitors. Secondly, there cannot be a universal economy of IP. The countries with different socioeconomic status formulate the IP rights which are in correspondence with their domestic requirements. Thirdly, intellectual property should not be excessively privatized. It should be taken into consideration in a wider context of socioeconomic development.

Aishwarya Says:

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