Pareto optimal outcomes in economics that don't happen; but, should?
  • Shawn
    13.2k
    Is it true that Pareto optimal outcomes in economics lead to greater efficiency for all consumers and producers alike?

    I specify this by stating that if a good, like a patent or intellectual property, achieves pareto optimality, then does this mean that it increases efficiency in the economy by making supply meet demand at a point where a firm or company wouldn't have to invest more money to meet rising demand?

    I have been working on some patents as of late, and have come to the conclusion that patents that increase efficiency in the market ought to be distributed pareto optimally to create a greater deflationary impact on the economy for consumers and producers alike. Yet, as normal patents are made with perfect knowledge for producers to invest in, pareto optimality often doesn't occur, as firms with more money to invest in patents will find and simply buy out the patent that either increases or harms their profits.

    A key example would be the wrong buying out of patents that increase deflationary tendencies in the economy as to be bought out by a producer of another or same good that would compete in a negative manner with their profits. Hence, the patent finds no use in the economy and is withheld from creating a deflationary impact on the economy, by creating growth in net efficiency for some domain application (core goods, as an example latter with "energy").

    What should one do about such a tendency in the patent realm? If gas company buys out my patent that normally entering the economy would produce an increase in efficiency for X Kwh of energy rather than Y Kwh from gas or oil, then shouldn't there be a law prohibiting such anticompetitive measures against a net increase in overall GDP from a more efficient use of a patent? Hence, shouldn't these pareto optimal outcomes be propped or even protected by the government to increase the net GDP and efficiency of a economy?

    May I ask, @ssu or @Benkei, about the last paragraph? Do such laws exist in Europe, apart from the US?
    Shawn Options
  • Shawn
    13.2k
    In essence, if a patent contributes to efficiency in the marketplace, but is bought out by a large firm that doesn't want to see a net decrease in (their) profits, then shouldn't someone intervene or is this just laissez faire at work?
    Shawn Options
  • Benkei
    7.7k
    Is it true that Pareto optimal outcomes in economics lead to greater efficiency for all consumers and producers alike? — Shawn

    This is almost 30 years ago for me. Pareto optimalisation is about multi-objective optimisation and results from the calculation of two optimum points (or more) of different objectives. These points do not coincide and the pareto optimal outcome is any point on the line between the two optimal points of these differing objectives. If consumer and producer efficiency are not aligned then the optimal point of one objective is not optimal for the other. So from the perspective of a consumer a certain point on that line can be less efficient than another and the same is true for the producer. Holistically, when taking both objectives into account Pareto optimal outcomes are presumably the most efficient points possible.

    I specify this by stating that if a good, like a patent or intellectual property, achieves pareto optimality, then does this mean that it increases efficiency in the economy by making supply meet demand at a point where a firm or company wouldn't have to invest more money to meet rising demand? — Shawn

    I would say that this depends on which multiobjective issues you're trying to resolve.

    Yet, as normal patents are made with perfect knowledge for producers to invest in, pareto optimality often doesn't occur, as firms with more money to invest in patents will find and simply buy out the patent that either increases or harms their profits. — Shawn

    I don't understand what you mean with "perfect knowledge" here.

    What should one do about such a tendency in the patent realm? If gas company buys out my patent that normally entering the economy would produce an increase in efficiency for X Kwh of energy rather than Y Kwh from gas or oil, then shouldn't there be a law prohibiting such anticompetitive measures against a net increase in overall GDP from a more efficient use of a patent? Hence, shouldn't these pareto optimal outcomes be propped or even protected by the government to increase the net GDP and efficiency of a economy? — Shawn

    If I'm understanding you correctly, you are worried that a patent that will have a social and environmental benefit is potentially suppressed if it is bought by a certain company. If this is about your own patents, the solution is obvious: don't sell.

    There are rules surrounding compulsory licenses and statutory licenses that can force a patent holder to provide a license at a specific rate (statutory) or a negotiated rate (compulsory). See for instance: http://documents.epo.org/projects/babylon/eponot.nsf/0/8509F913B768D063C1258382004FC677/$File/compulsory_licensing_in_europe_en.pdf

    I don't think pareto optimization is a consideration for such types of licenses from a statutory perspective but it could be part of argumentation in specific court cases but I'm not active in this field to know for certain.
    Benkei Options
  • Shawn
    13.2k
    ↪Benkei


    I see.

    I'm more concerned with the issue if a patent that can contribute to greater efficiency in the economy or as you say, a social and environmental benefit, is bought out by a firm to prevent losses to their company, and if that were true then should the government intervene?

    What do you think?
    Shawn Options
  • Benkei
    7.7k
    I'm more concerned with the issue if a patent that can contribute to greater efficiency in the economy or as you say, a social and environmental benefit, is bought out by a firm to prevent losses to their company, and if that were true then should the government intervene?

    What do you think?     — Shawn

    Well, should in my book yes, but then I think we should dispense with patents and copyright all together. So I'm the wrong guy to ask. There are grounds of course but be prepared for lengthy court cases:

    Compulsory licensing of a patent is provided for under Article 5 of the Paris Convention to prevent patent abuse.[7] Article 5, section A(2) provides that ‘[e]ach country of the Union shall have the right to take legislative measures providing for the grant of compulsory licenses to prevent the abuses which might result from the exercise of the exclusive rights conferred by the patent, for example, failure to work.’ Section 4 provides that the compulsory licence may not be applied until after ‘the expiration of a period of four years from the date of filing of the patent application or three years from the date of the grant of the patent, whichever period expires last.’ The patentee can avoid the compulsory licence if he ‘justifies his inaction by legitimate reasons.’ The licence is non-exclusive and non-transferable. — International bar association
    Benkei Options
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