Common Tragedies

Thoughts on Environmental Economics

Assault the battery

Posted by Daniel Hall on June 24, 2008

There’s a fair amount of skepticism in the econoblogosphere about McCain’s proposed $300 million prize for an auto battery. Tim Haab wonders:

But, why does the government have to provide the incentive? Shouldn’t markets do that? What am I missing?

Well, one potential reason, and something we’ve mentioned here before, is that much economic research finds that the existence of knowledge spillovers means that the socially optimal level of R&D investment is (conservatively) two to four times the level of actual investment. In other words, we as society get more than we pay for when we fund R&D.

Other commenters argue that the prize is unnecessary on more practical grounds. Tom Lee says:

But if someone were to invent a better [battery] they’d already be poised to make a huge amount of money through its commercialization. Offering prizes for innovation isn’t always a terrible idea — for pharmaceuticals with a limited market of potential users it can make sense due to the huge costs associated with developing and testing a new drug. But everyone in the developed world needs better energy storage technology, and they need it right now. … So sweetening the pot is unnecessary. Anyone who has a good idea about how to build a better battery is already working on the problem.

I’ll admit this argument sounds pretty convincing. Given the price of oil there’s a strong existing incentive to develop better batteries. Still, the possibility of knowledge spillovers lurks in the background…

Which brings us to a comment from a Free Exchange blogger, who argues that the structure of a prize doesn’t fit the problem:

The question is, will the prize induce an increase in research activity? Where batteries are concerned, this seems highly unlikely. Prizes are better suited to areas where there is not yet a clear market application for a discovery…

I can think of one arena where better energy storage could be put to very good use, and yet simultaneously lacks a clear market signal: electricity. The grid is still essentially a regulated environment. Energy storage would greatly increase the attractiveness of many renewable generation technologies which are inherently intermittent, but the “market” for such an innovation is a fragmented patchwork of regulatory agencies.

I suspect that energy storage for the grid might be a socially desirable spillover from McCain’s auto battery prize. This means that his proposal is less bad than many seem to think — but also less good than either a direct prize for grid-based energy storage, or a reform of our transmission policies.

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4 Responses to “Assault the battery”

  1. Larry Sheldon said

    I find it interesting that the Internet is being used to argue about the usefulness of government-funded research.

  2. Evan Herrnstadt said

    I don’t know that we’re really debating the usefulness of gov’t-funded research, as much as we’re considering various models of disbursement.

    The analogous question is really, what would things be like today if DARPA didn’t exist, and the gov’t instead offered the private sector a huge prize to develop some sort of comprehensive computer-based communications network. I’m not sure we’d have the internet as prizes are best for encouraging specific technology outcomes, whereas the internet was a somewhat unpredictable and organic innovation I think.

  3. Governments, almost by definition, are not as sensitive to customer needs as private firms. That, in my opinion, is the best reason to favor a patent system over a prize system for promoting innovation.

  4. Omri Schwarz said

    If McCain wants an increase in research activity, he should propose paying for it, not dangling a needless prize. 300M is nice, but it won’t pay my kids’ orthodonist bills until I win it, if I do…

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