The profits and waste illustrated in Figure 1 reflect a limited period of production and sales, such as one year. Patents are not forever. Eventually, the patent will run out, and competition from imitators will then increase the industry output to Q2. Therefore, both the profits and the waste will continue only for the term of the patent. The longer the term of the patent, under law, the greater both the profits (to the holder of the patent) and the waste (from the viewpoint of the consumers).
The point of all this is: how long should the term of a patent be? Taking a particular invention, we can answer the question pretty precisely, at least in principle. The term should be long enough to make the design work to create the invention a profitable investment, and no longer. If the term is too short, then the invention will not be created, and the consumers will not have any benefit from it at all. On the other hand, if the term is too long, consumers will suffer high prices and monopoly waste just to provide a windfall profit to the monopolist. The patent should continue just long enough for the monopoly profits to repay the cost of development of the invention, and no longer.
The difficulty is that the cost of development and design to produce a new invention is unpredictable, and differs from one invention to another. A patent term that is too long for one invention will be too short for another. Since there can only be one legal term for a patent, it will be too long in some cases and too short in others.
How long should the term of a patent be? To an economist, this question is very much like: how much steel should the economy produce? Both are questions to be answered by marginal cost-marginal benefit analysis. This is illustrated by Figure 2.
Here, the "cost" is the sum of the waste triangles (xyz) for all of the inventions under patent, and "marginal cost" is the increase in that cost as the patent term increases by one year. Marginal cost (shown in red) rises because, as the patent term increases, a larger and larger proportion of patented inventions are monopolized beyond the period necessary to repay the development cost of the invention. The "benefit" in this diagram is the sum of all net benefits (vxp0+p0xzc) for all inventions actually created. Marginal benefit (shown in blue) is the addition to this amount as the patent term increases by one year. Marginal benefit is positive because a lengthening of the patent term will lead to an increase in the number of inventions; but it is downward sloping (beyond some threshold) because the more profitable inventions will be undertaken with a relatively short patent term, and longer terms bring less profitable inventions into existence. The optimal term is the number of years corresponding to the intersection of the two lines, according to the marginal cost-marginal benefit rule.
Of course, in order to figure out just what the optimal term is -- just how many years? -- we would have to have numbers to attach to the lines labeled "marginal benefit" and "marginal cost." This is a difficult problem, and while there has been some research on it, there is no well established answer to the question. What we can be pretty sure of is that there is an optimal term, in principle, so that the idea of offering patents for a limited term is a sound one -- even if it is hard to be sure just what the term should be.
Summary on Patents
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