The presumption that costly new knowledge would be undersupplied by the private sector is based on the essential characteristic of new knowledge. It is (A)_________ and (B)_______.
Understanding the Characteristics of New Knowledge
The question asks about the essential characteristics of new knowledge that explain why the private sector might undersupply it. This concept is central to understanding why governments often play a role in funding research and development or protecting intellectual property.
The presumption that costly new knowledge would be undersupplied by the private sector is based on its nature as a public good, at least in part. Public goods typically possess two key characteristics: non-rivalry and non-excludability.
What is Non-Rivalrous Knowledge?
A good is considered non-rivalrous if its consumption by one person does not prevent or diminish its consumption by another person. For example, listening to a radio broadcast or enjoying a public park are non-rivalrous activities. In the context of knowledge, once a piece of information or a new technology is discovered, its use by one individual or firm does not prevent others from using it simultaneously. Sharing knowledge does not deplete it.
What is Non-Excludable Knowledge?
A good is considered non-excludable if it is difficult or impossible to prevent individuals who have not paid for it from consuming it. For instance, it is hard to prevent people from benefiting from street lighting or national defense once they are provided. For new knowledge, especially fundamental discoveries, it can be challenging to fully prevent others from accessing and using that knowledge, even if patents or copyrights offer some temporary protection. Information tends to spread.
Why These Characteristics Lead to Undersupply
These two characteristics create challenges for the private sector:
- Non-rivalry: Since multiple people can use the knowledge simultaneously at little or no extra cost, the marginal cost of providing it to an additional user is effectively zero.
- Non-excludability: Because it's hard to prevent non-payers from using the knowledge, private firms find it difficult to charge a price that reflects the value of the knowledge or even recoup the initial high costs of generating it (research and development).
When firms cannot easily charge for the use of knowledge or exclude non-payers, they have less incentive to invest heavily in creating it in the first place. This leads to an undersupply of new knowledge compared to the socially optimal level.
Analyzing the Options
The question states that new knowledge is (A)_________ and (B)_______. Based on our understanding:
- (A) should be the characteristic related to multiple people using it without diminishing it: Non-rivalrous.
- (B) should be the characteristic related to the difficulty of preventing non-payers from using it: Non-excludable.
Let's look at the options provided:
| Option | (A) | (B) |
|---|---|---|
| 1 | Non-rivalous | Non-excludable |
| 2 | Non-rivalous | Excludable |
| 3 | Rivalous | Non-excludable |
| 4 | Rivalous | Excludable |
Comparing our analysis with the options, Option 1 correctly identifies new knowledge as being (A) Non-rivalrous and (B) Non-excludable.
Conclusion
The essential characteristics of new knowledge that contribute to its potential undersupply by the private sector are that it is Non-rivalrous and Non-excludable. These characteristics make it difficult for private firms to profit sufficiently from creating knowledge, leading to a market failure where the market provides less knowledge than is socially beneficial.
Revision Table: Characteristics of Goods
| Characteristic | Definition | Example (often considered this type) | Relevance to New Knowledge |
|---|---|---|---|
| Rivalrous | One person's consumption prevents another's. | A slice of pizza | New knowledge is typically NOT rivalrous. |
| Non-rivalrous | One person's consumption does not prevent another's. | Radio broadcast | New knowledge IS typically non-rivalrous. |
| Excludable | Possible to prevent people who haven't paid from consuming. | Subscription TV | New knowledge can be difficult to make fully excludable, though IP rights help partially. |
| Non-excludable | Difficult or impossible to prevent people who haven't paid from consuming. | Street lighting | New knowledge IS often non-excludable in practice. |
Additional Information: Public Goods and Market Failure
Goods are often categorized based on these two characteristics:
- Private Goods: Rivalrous and Excludable (e.g., food, clothing)
- Public Goods: Non-rivalrous and Non-excludable (e.g., national defense, basic research)
- Common Resources: Rivalrous and Non-excludable (e.g., fish in the ocean, clean air)
- Club Goods: Non-rivalrous and Excludable (e.g., cable TV, private park)
New knowledge, particularly fundamental scientific knowledge, shares significant characteristics with public goods (non-rivalry and non-excludability). This leads to a classic case of market failure, where the free market equilibrium does not result in an efficient allocation of resources (in this case, too little investment in creating new knowledge). Governments often intervene through patents, copyrights, grants, or direct funding of research to address this market failure and encourage innovation and knowledge creation.
Important Questions from Economy
The Five Year Plan was first launched in
Which of the following was/were the feature(s) of Lenin’s New Economic Policy (NEP) for the Soviet Union?
1) Private retail trading was strictly forbidden
2) Private enterprise was strictly forbidden
3) Peasants were not allowed to sell their surplus
4) To secure liquid capital, concessions were allowed to foreign capitalists, but the State retained the option of purchasing the product of such concerns
Select the correct answer using the code given below:
Which one of the following was set as a target of average growth of GDP of India over the plan period 2012-2017 by the Approach Paper to the Twelfth Five year Plan?
In ________ economies, all productive resources are owned and controlled by the government.
Private ownership of the means of production is a feature of a _______ economy.
