alleryStart learning →Because new knowledge behaves as a public good, the private sector tends to:
AInvest exactly enough
BRefuse to invest at all
CUnderinvest in innovation
DOverinvest in innovation
Answer & Solution
Correct answer: C. Underinvest in innovation
1. A firm only recovers the part of a benefit it can charge for.
2. New knowledge often becomes what economists refer to as a public good.
3. Rivals can use the idea without paying the innovator.
4. That gap between private and social return is why the private sector underinvests in innovation.
_Source: OpenStax Principles of Microeconomics for AP(R) Courses 2e (CC BY 4.0), Ch 13 'Positive Externalities and Public Goods', sections 13.1-13.4_
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