Final answer:
Research and development create positive externalities by producing innovative technologies that benefit society beyond the entity that invested in the R&D.
Step-by-step explanation:
Company investments in research and development (R&D) have the capacity to generate positive externalities which are benefits that extend beyond the original investment and can be enjoyed by others in society. When a company invests in R&D, it can lead to new technologies that, while costly to develop, becomes available for other firms to utilize. This diffusion of innovation can stimulate further advancements and solutions across various industries.
Additionally, while R&D can be expensive for taxpayers, especially when subsidized, it serves to elevate the technological and scientific landscape, which can indirectly benefit society. For example, projects like the development of new apple varieties by the University of Minnesota demonstrate the extensive time and effort that goes into a single R&D endeavor, which ultimately provides value once the product reaches the market. Similarly, firms like Big Drug Company, when planning their R&D budget, take into account the potential for spillover benefits to society, which might include effects like inspiring additional creative endeavors.
Furthermore, policies such as tax breaks for R&D expenses encourage firms to invest more in research, with studies indicating that for every dollar of tax credit, firms are likely to invest an equivalent or even greater amount in R&D, yielding a favorable benefit-to-cost ratio.