Skip to main content

2008-2009 Essay Contest Advanced Economics First Place Essay

Funding the Ivory Tower: Government Involvement in Energy Research and Development

Robert Muellerleile
Saint Thomas Academy
Mendota Heights, Minnesota

From the time when the human race didn't know what to do with itself other than hunt and gather to today when humans seem to have no obstacle that hard work and a pinch of ingenuity cannot overcome, the world has been changed by invention and innovation. And yet, our world is reliant on a finite fuel source that was formed before humans invented the wheel; without fossil fuels humans would struggle with electricity, transportation, or heat. If invention is the means of creating a solution to a problem that exists in society,1 it should be easy to see that solving our world's reliance on fossil fuels should be one of the highest priorities for inventors. For decades scores of very intelligent people have dedicated themselves to this task, yet the answer has not yet presented itself. The incentive to create an alternative source of energy in the United States seems to be missing because pure entrepreneurial potential does not seem to provide sufficient motivation; this is because potential gains are usually offset by higher up-front costs, so in the long run much of research and development will not pay off. Here, clearly, some inducement for research must be created, and it becomes the responsibility of the government to step in and ensure progress is made in finding alternate energy sources.

This is where the United States government steps in to pick up where the private sector leaves off. Making a logical choice that any discovery would require a great investment of human capital in addition to the provided funding, the government chooses to push for research at institutions of higher learning where investment in human capital occurs. The government recognizes that in situations where research and development of a new technology is at stake, the market tends to produce an amount that is less than the socially desirable amount because a free market does not take into account the presence of externalities, and the potential for research to solve the world's reliance on fossil fuels would certainly improve the quality of life in today's world.

One way the government encourages non-profits and universities to partake in research and development is by allowing the universities to apply for patents and reap financial gains by offering licenses to private businesses to produce their inventions.2 If a university thought that if it discovered a new technology that would greatly impact the way Americans produce or consume energy, they would receive no gains aside from general acknowledgement they might be less inclined to participate in such research. So the United States government has amended the patent system to encourage research and development at universities and non-profits so that they can make financial gains from research funded by federal grants? 3 The Bayh-Dole Act has led to university research that has been more marketable and usable by ordinary consumers, and it has changed the way universities do research; The Economist has gone so far as to claim that the Bayh-Dole Act is the "the most inspired piece of legislation to be enacted in America over the past half-century."4

However, there are drawbacks to this system. The motivation for research often shifts to what would be the most profitable, and not what would be the best solution for the problem. The line between research for the sake of society, which the government funds, and research for commercial development becomes blurry.5 Additionally the universities conducting the research and the researchers themselves are less likely to send publications of the research for review to the larger scientific community.6 Jerome Karle, the 1985 Nobel Laureate in chemistry, fears that the scope of research funded by the federal government is being limited to the areas that the government feels may be important to national security or critical for national competitiveness.7

However, the current system of granting funding has been astoundingly successful at providing some universities the means to develop and patent a solution without necessarily requiring substantial investment by the university. This has led universities such as the tiny California Institute of Technology to gain roughly as many patents over the past five years as schools such as the Massachusetts Institute of Technology, and Stanford University, with just over 150 per year.8 However, the profits for universities, hospitals, and research institutions in the United States have not been overwhelming. In 2006 aggregate revenues across the United States from patents totaled $1.85 billion, or just over five percent of research and development funding by the federal government over that same time.9

According to the National Science Foundation, in the year 2006, academic institutions spent over $48 billion on research and development with the federal government accounting for 63% of R&D spending.10 The largest academic R&D expenditures came from the Massachusetts Institute of Technology, which spent $614 million in 2007 alone.11 MIT spends huge amounts of money around the world trying to find alternative energy sources. Their Laboratory for Energy and the Environment has indicated that among its most important areas of concern is whether the products they develop can be successfully marketed and "initiate action that motivates participants and shapes the action environment."12 MIT is just one example of a university that receives federal funding looking for an alternative energy source, especially one that would provide for more opportunities for research in the future, and one that could become a marketable source of energy. In 2007 the federal government spent more that $2.5 billion on R&D related to finding alternative fuel and energy sources.

And although the results of R&D are not necessarily apparent, because many new inventions or processes for energy are not yet commercially viable, the groundwork is being laid for future inventions that may come into common use. Because of federally funded research and development, the world has seen solar cells surpass 40% efficiency for turning the sun's energy into electricity,13 and single-passenger cars that can travel over 3,000 miles on one gallon of gasoline.14

In addition to gains made through invention, one externality that exists in funding research at universities is that people with an innovative idea are drawn to academia to get federal funding and then pass on their knowledge to their student research assistants; thus perpetuating the inventive spirit. This is one unintended positive externality caused by funding research at universities. The federal government can help correct the market in this situation by funding the research that in an uncontrolled market would be undersupplied relative to the social equilibrium.

No one knows when the answer for the world's energy problems will arrive. However it is clear that it will take some time for any new technology for transportation, or general electrical supply to reach American society. This leads to underproduction in these areas of research, and the slack has to be picked up by somebody. It is clearly up to the government to provide incentives to those who may have an idea on how to solve this problem and just lack the means or motive to see their concept come to fruition. With the proper incentive, the use of fossil fuels may go the way of the horse and buggy making all of our lives easier.


1/ William H. Middendorf, What Every Engineer Should Know About Inventing p.2-3.

2/ Stephen Quake, "The Crumbling Ivory Tower," editorial, The New York Times, February 24, 2009, (accessed March 12, 2009).

3/ US Code Title 35: Part II, Chapter 18 §200.

4/ [No authors listed] (2002) Innovation's Golden Goose.
The Economist 365: 3.

5/ Stephen Quake, "The Crumbling Ivory Tower."

6/ Homayoon Khanlou and Michael Weinstein, "No Results? No Research Money," editorial, The Los Angeles Times, April 25, 2008., (accessed March 12, 2009).

7/ Jerome Kade, "The Role of Science and Technology in Future Design," The Nobel Foundation, June 29, 2000, (accessed March 12, 2009).

8/ "The Caltech Office of Technology Transfer," Division of Engineering and Applied Science at Caltech, (accessed March 12, 2009).

9/ Anthony D. So, et al., "Is Bayh-Dole Good for Developing Countries? Lessons from the US Experience," Public Library of Science,
(accessed March 12, 2009).

10/ National Science Foundation, "Science and Engineering Indicators," Division of Science Resource Statistics, (accessed March 12, 2009).

11/ National Science Foundation "Universities Report Continued Decline in Real Federal S&E R&D Funding in FY 2007" Division of Science and Resource Statistics.

12/ MIT, "Breakthroughs in the System of Sustainable Technologies, Actions, and Institutions: Understanding and Experimenting the Dynamics of Green Innovation," Global MIT. (accessed March 12, 2009).

13/, "Solar Cell Breaks the 40% Efficiency Barrier," Renewable Energy World, December 7, 2006, (accessed March 12, 2009).

14/ US Department of Energy, "Extreme MPG,", (accessed March 12, 2009).