Assault the battery
Posted by Daniel Hall on June 24, 2008
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.