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Governments around the world use the patent system to protect the intellectual property of firms, as they believe that it is the most effective way

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Governments around the world use the patent system to protect the intellectual property of firms, as they believe that it is the most effective way of encouraging innovation and dynamic efficiency. A patent acts as a barrier to entry and allows innovative firms to earn supernormal profits from their original ideas. If firms were able to simply copy the innovations of rival firms, no rational firm would spend time or money on research and development as it would be in their best interest to free ride on the innovations of others. Therefore in the absence of a patent system there would be little innovation and hence little dynamic efficiency. Not only do patents and the subsequent supernormal profits provide the incentive for innovation they also provide the funds for continuing innovation. Innovative firms spend much of their supernormal profits on R&D in the hope of developing further product or process innovations that will allow them to continue to earn supernormal profits

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