Final answer:
The FASB requires R&D costs to be expensed due to the difficulty in objectively determining their future benefits and the uncertain outcomes of such efforts. Governments may incentivize private R&D with tax credits to stimulate investment without direct government intervention, leveraging private sector efficiencies and creating broader social benefits.
Step-by-step explanation:
The FASB (Financial Accounting Standards Board) requires research and development costs to be expensed because it is difficult to objectively determine the future benefits of such activities. Unlike physical assets, R&D doesn't guarantee future economic benefits, and the actual outcomes of R&D efforts are uncertain. Additionally, while R&D can produce technology that firms broadly use, this availability can reduce incentives for investment due to the non-exclusive nature of the benefits (technologies can become available to others, often unless protected by patents). Therefore, expensing these costs as they are incurred reflects the uncertainty associated with the future economic benefits of R&D.
Providing incentives for private investment in R&D, such as tax breaks, can be more cost-effective from a policymaker's perspective. The research and experimentation (R&E) tax credit is an example of a policy that stimulates additional private sector investment without direct government spending on specific projects. By encouraging firms to invest in R&D through tax incentives, governments can leverage private sector efficiencies and potentially create spillover benefits for the broader society, often referred to as Dsocial benefits.