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Final

exam answers


Department
Economics
Course Code
ECO320H1
Professor
Donald Dewees
Study Guide
Final

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Last Updated: 06/10/2003
1
Property Rights
1 SHORT ANSWER QUESTIONS
Comment on the following:
1. [2002, Midterm #1a] What are the costs and benefits associated with making patents
more or less broad? Both from the point of view of the inventor and society at large.
A (See page 123 of the textbook (or p.129 of 3rd edition)) If the claim is too broad,
you don't get your patent, either because someone else has already done
something that fits your broad claim or because the court thinks you are
claiming more than you invented. [Aside: Morse's sixth claim (disallowed) was
for all ways of using electromagnetism to transmit letters and figures to a
distance--and thus covered the fax, EMail, TV, ... . That was his idea, the
telegraph he had invented was simply one implementation of that idea. The
court didn't buy it.]
If the claims are too narrow, the patent is not worth much to the inventor and
therefore the return to investment in innovation is too small.
Broad patents discourage future innovation.
2. [2002, Midterm #1b] Patent races: If I make my invention a day before you do, I get
all the rights to it, and as my competitor, you get none. Discuss the costs and benefits
associated with this feature of the patenting system.
A This system of first to register gets all the rights encourages rent seeking patent
races. There is an incentive for inefficient competition to be first.
3. [2001, Midterm]Comment on the following:
A trade secret is information whose value to its possessor depends on its not
becoming generally known. Trade secret law defines the rights that the rightful
possessor of a trade secret has against those who have obtained the secret
wrongfully, through breach of contract, say, or an employee's violation of his duty
of loyalty, or a trespass. It permits him to collect damages based on his loss or the
misappropriator's gain. Sometimes, but not always, it permits him to enjoin use of
the secret by someone who received it from the guilty party. An injunction will
ordinarily not be available against a third party who could not be expected to have
known that the trade secret was stolen and has taken actions, such as building a
factory using the secret, that would leave him worse off it enjoined than if he had
never received the secret. Unlike patent or copyright, trade secret law does not
provide protection against someone who has obtained the secret without the
consent of the owner but without violating his legal rights, for example, by

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Last Updated: 06/10/2003
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reverse engineering a product that embodies the secret. It thus gives protection
well short of full-scale property rights. This brief description suggests two
puzzles. The first why trade secrets are not, like patentable inventions, treated as
property. The second is why, if trade secrets are not patentable, they are protected
at all. (from David Friedman, 2000)
Beyond these puzzles, why would anyone ever choose to not patent a patentable
invention and merely to keep it as a trade secret.
A There are a number of possibilities here. For example, the secret may not be
patentable, the secret may be impossible to enforce if it became public
knowledge (as required by the registering of a patent), or the information may
be important for future innovations and if the secret were known it may allow
others to patent the next invention first.
4. [1999, Midterm] Why would a firm choose to keep an idea as a `trade secret‘ as
opposed to patenting it? Is it efficient for a firm to do this? Why/why not and/or
when/when not?
A See question 3 above.
5. [2001, Midterm] The Coase Theorem implies that the allocation of property rights
makes no difference for any outcomes. Illustrate this using the following example:
Raquel values throwing loud rave parties at $200, and Stephanie values having quiet
meetings of her stamp club at $150. Since they are housemates, they can only have
one type of party.
A If Raquel were given the right Stephanie would not be willing to pay her enough
to stop having parties. On the other hand, if Stephanie were given the right,
Raquel would be able to pay her somewhere between $150 and $200 to allow the
parties (Nash bargaining solution = $175). Either way, parties will occur. This
assumes that transaction costs to these negotiations are low (less than the $50
surplus.)
2 PROBLEMS
1. [2002, Midterm #1a] Two neighbours would like to decide how many trees to plant
along their property line. Alice would really like a shady yard. Beatrice would prefer
a sunny yard. The costs and benefits associated with this problem are described
below.
Number of trees
along the fence line
Marginal Benefit
to Alice
Marginal Cost to
Beatrice
1st tree 500 100
2nd tree 200 200
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