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1. 1. Adam_Smith 04:41 PM 7/2/11

   The way governments in advanced Western economies encourage pharmaceutical R&D is to award patents; i.e., a protected monopoly for a limited time on the sale of the products developed. The companies charge higher than competitive market prices as there is otherwise little point to having patent protection. The research is naturally directed to products treating the problems of those either wealthy enough to pay those prices out of pocket or who will have their bill paid by private or government insurance. The losers, then, are mainly poor inhabitants of poor countries.
   
   Recently Mr. Gates' company, Microsoft, inadvertently revealed the double edged nature of software patents in an argument before the US Supreme Court. It argued that the current "clear and convincing evidence" standard for contesting improperly awarded patents impedes innovation because companies either cannot develop combinations of their own technology with the technology that has been patented improperly or must pay licensing fees that could have been spent on R&D instead. However, that effect is no different in the case of properly awarded patents therefore leading to the conclusion, if we buy Microsoft's argument, that all patents are actually harmful to innovation. In reality, patents have a mixed effect on innovation, simultaneously providing increased incentive and decreased opportunity for it.
   
   When policy makers spare taxpayers the cost of a direct subsidy for production of some good or service they wish to promote and use a market intervention instead, (be it in drugs, software or housing), they ought to be aware that there will instead be a price paid in perverse economic effects, however hidden it might be.
   

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