Any patent system necessarily has public and private components. Every such system rests on state intervention to do everything from defining a patentable invention to establishing the formalities of patent examination and recordation. Yet the patent system is also deeply private, for individual market actors make their own decentralised decisions over where to invest resources to create patentable inventions.

There is an undeniable downside to this mixed system, for patent owners will charge customers a price for patent use that exceeds its marginal social cost of production. Elevated prices thus preclude some socially beneficial patent uses. The standard justification for this output restriction rests on two premises. The first is that inventors will only invest in innovative technologies if they can recover their front-end costs, which requires them to abandon marginal cost pricing. The second is that the patent monopoly only covers some particular substance or device, but never an entire field. That limited patent scope fosters competition from new patented inventions that enter a market niche served by prior patents.

Neither of these justifications, however, is a complete answer to the charge that patent protection unduly restricts the use of particular products. Is it possible then to find some way to get the best of both worlds so that ample incentives to produce are married to the low prices that generate extensive use.

One ingenious proposal to square the circle is to nationalise certain key patents, especially for pharmaceuticals. The beguiling logic, advanced by among others Robert Guell and Marvin Fischbaum, urges the government to acquire key patents by paying their owners sums that would leave them in the same position that they would have enjoyed if allowed to exploit their patents for the reminder of their useful lives. The lump sum payment is meant to neutralise any disincentive to invention from nationalisation. Thereafter, the government freely licenses the acquired drugs to all comers, such that competition drives prices down to the marginal cost of production, thereby allowing full public access. In some instances, this maneuver could be done by voluntary purchase. In others, perhaps by condemnation. What could be better?

Lots, it turns out. The first mistake of this proposal is its narrow frame for overall evaluation. The revenues needed to fund government patent purchases must come from somewhere. General revenues or targeted taxes of patented pharmaceuticals already in the market are the only available sources. But these taxes, however calibrated, necessarily increase the cost of other goods, thereby raising their prices above marginal costs. Any resource gains for pharmaceutical are thus offset by losses elsewhere, which are in turn compounded by the administrative costs of programme implementation.

Worse still, the proposal runs into choppy waters even if we focus solely on the pharmaceutical industry. Outright purchases of this magnitude are unprecedented. They are tricky business, no matter how done. The valuation of real estate, for example, requires the parties to figure out the fair market value of a piece of land whose future uses may change over time. Any real estate appraiser would be gun-shy at negotiating these complications into the pharmaceutical area, where the outright purchase of one blockbuster patent could cost the state billions.

The calculations will stumble because no one knows today how one patent will fare against new drugs, perhaps from a different class, that may shortly come on the market. Nor can any outright transfer easily deal with potential challenges to patent validity or allocate the risk of future tort liability. It is for good reason that we see virtually no outright patent sales in the private sector.

In addition, these hefty patents price tags make it impossible for any government to buy all new drugs. So, who figures out which drugs will be acquired? We can expect to see a strategic scramble as companies try to figure out whether they want to hock their drugs or steer clear of government entanglements. Once the dust settles, moreover, any selective purchases has unfortunate ripple effects for the remaining drugs within the same class, which now have to compete with a subsidised product. As no one knows in advance, whose drug will be (un)fortunately acquired, the manifest uncertainty will filter back to undermine the incentive to invest, which this nationalisation proposal hoped to preserve.

We have an important general lesson to learn. No legal or social innovation should be evaluated on the cheerful assumption that deft government action can excise a single identified imperfection. The nationalisation - or regulation - that removes one imperfection is likely to create another of equal or greater magnitude. The wise approach avoids such bold initiatives without a clear warrant for changing the status quo. And none exists for this dramatic revision of the patent system.

Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law, The University of Chicago, and the Peter and Kirsten Bedford Senior Fellow, The Hoover Institution. His recent book, Overdose: How Excessive Government Regulation Stifles Pharmaceutical Innovation is available from Yale University Press.

Copyright 2006 The Financial Times Ltd