The positive externality.
Business transactions are at least conceptually beneficial to the parties to the contract. However, the benefits may not necessarily be restricted to the parties only. Third parties may be benefited in many ways. For example there may be a contract between two parties for the production of public goods. Those positive external effects which the parties neither intend nor require, but nevertheless are an outcome of a business transaction are known as positive externality.
Technology is one such positive externality. Business and trade necessitate technology, in fact technology is a side function of the trade. But technology benefits all. Its benefits are not only confined to the people who are involved in the transaction. Just as in the case of pollution which is a negative externality the correct response was to make the polluter pay to the society, in case of technology the correct response is to make the society pay to the person. The inventor, whose invention is going to benefit the whole society should have the incentive to invest in the invention. The creation must be protected and the creator must be given his share in the profits that accrue to the society because of his creations.
Even otherwise though free society is deemed to promote invention, in a perfectly free market there is a little scope of innovation. let us imagine a scenario where various companies are manufacturing the same good. One company decides to use a new and innovative technology. It takes huge risks and invests in the new technology. It thus increases the cost of its production. But if the technology is not exclusively owned by the company it will merely increase the cost of its production and price of its good and thus will ultimately be wiped out. Whereas the other companies will use the technology innovated by the original company and get richer. Innovation is usually a costly affair and converting an idea in a marketeable product requires a lot of time money patience and energy. But if this new technology is available to all the others for free then there is no incentive to innovate and produce. Thus, a society where technological innovations are not protected ends up having too little of them. Among other things, reason for the wealth of America is the protection to intellectual property rights awarded in that country. The constitution of America contains a declaration to the effect that the Federal and State governments shall protect the creations of mind by letting the creator the right to their exclusive use.
However, not all innovations end up getting suitably rewarded. LASER is , for example, an extremely useful innovation. Most of the technological breakthrough of the LASER technology has been attained through the scientists and researchers who merely sit in their Labs and Offices and get nothing more than their actual salaries. There is a review system of sorts in place but review of research in such matters ends up being highly subjective.
Therefore, society has paid little for the technology it has ended up using. There are basically three ways of protecting intellectual property rights. First is copyright. Copyright is an intellectual right that gives the creator of an original work the right to use the work exclusively for a limited time. The purpose is to promote the creation of such works. Though the way copyright law is structured in many countries it is dubious whether the purpose is to give incentive or to protest vested interests. For example for literary dramatic artistic and photographic work with a known and identifiable author the duration of copyright is the lifetime of the author + 60 years after his death begining with next calender year from the death. For anonymous works posthumous works and government works the copyright is 60 years from the date of publication. Whether such a long period of copyright after the death of a creator will provide incentives during lifetime of the author is doubtful. Second is patent. Patent is the right to use exclusively an invention for a limited time period in exchange of full and detailed subsequent public disclosure of the invention. An invention is defined as a solution to specific technological problem and may be a product or process. A patent is valid for 20 years from the date of filling of application. The patents have their own set of problems apart from their being violated and misused. First is that the invention should be new and innovative. Same things can not be patented again and again. What many companies do is that they make minor changes to the goods and keep on patenting the good again and again. This leads to technology being restricted for duration more than allowed. Related is the the lack of suffiecient machinery to ensure that the patents are actually worth patenting. Many people almost get patented anything. Third are the trademarksand fourth are the geographical indicators.
The protection of intellectual property rights is necessary for economic growth.