Suppose that it would cost a firm $10 million to develop a new drug. In the absence of a patent, other firms will be able to copy and bring to market a generic equivalent of the drug in three years. In each of these three years, the firm would earn monopoly profits of $3 million. A patent will generate monopoly status for the firm for twenty years. If the government knew this information ahead of time, which of the following is most correct?
◦ The government should not grant a patent to the firm, because monopoly leads to efficiency losses relative to the competitive market.
◦ The government should grant a patent to the firm, because the firm would not produce the drug at all without a patent.
◦ The government should not grant a patent to the firm, because the firm would earn monopoly profits for three years even without the patent.
◦ The government should grant a patent to the firm, because even with a patent the firm will not earn a monopoly profits.
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