Question

Explain why, in the absence of a patent, a technical innovation invented and pioneered in one tofu factory will cause the supply curve for the entire tofu industry to shift to the right. What will finally halt the rightward shift? Use supply and demand curves to demonstrate what happens.   If the government grants a patent to the one tofu firm that developed the innovation, what type of market for the newly innovated and differentiated product would result (ie perfect competition, monopolistic competition, oligopoly, or monopoly)? Why would the government do this? What would happen to price and consumer surplus under a patent?

Answer 1

In the absence of patent, technical innovation by one firm will help raising production by all of the firms which will produce more of the goods in the market thereby raising the aggregate supply of tofu in the market.

A patent granted by government to the firm who found the new method of production can halt the rightward shift. If government grants permission to the one firm, it will create the market monopoly. Government will do this to induce technological advancement in the society such that other firms does not free ride from the technically invention by one firm and own equal zeal to innovate. Under a patent, monopolist will charge a higher price which will reduce the consumer surplus.