Final answer:
If there are no external benefits, the demand for borrowing and investing in R&D will be lower because private firms will not capture the full social value through their return on investment.
Step-by-step explanation:
The demand for borrowing and investing in R&D will be lower if there are no external benefits. In the described scenario, Big Drug's demand for financial capital is represented by two curves: Dprivate, which reflects the demand considering only private benefits, and Dsocial, which includes both private and social benefits. If the firm receives only the private benefits of investing in R&D (no spillover benefits to society), it wants to borrow less—$30 million compared to the $52 million that society would deem optimal due to the external benefits. Investments in R&D often create positive externalities; these are benefits enjoyed by third parties not directly involved in the transaction. Without these external benefits, the private firm has less incentive to borrow and invest because the return on investment does not fully capture the value to society that the R&D would have generated.