Question

All of the following statements are correct except

A) knowledge about one process spills over into other segments of the economy.
B) additional knowledge makes people more productive, and there seems to be no tendency for the additional productivity from additional knowledge to diminish.
C) knowledge has no external benefit.
D) knowledge might be an exception to the principle of diminishing marginal benefit.
E) it is necessary to use public policies to ensure that those who develop new ideas have incentives to encourage an efficient level of effort.

Answer 1

The incorrect statement among the options provided is option C, which claims knowledge has no external benefit. Knowledge indeed creates positive externalities that benefit the wider economy, thus the correct answer is that knowledge does have external benefits.

Step-by-step explanation:

The correct answer to the question is option C: knowledge has no external benefit. This statement is incorrect because knowledge creates positive externalities that spill over into other areas of the economy, benefiting parties who were not involved in the initial creation or acquisition of that knowledge. For instance, if a firm develops new technology, the benefits are not confined to that firm alone; rather, other companies and society as a whole may benefit as well.

It is also true that knowledge can be an exception to the principle of diminishing marginal benefit, as stated in option D; additional knowledge tends to make people more productive without a corresponding decrease in productivity gains. Furthermore, public policies may be necessary to ensure that innovators are incentivized to create new ideas, as some benefits of their work will spillover to the rest of society, which is addressed in option E.