Positive externalities and R&D: Two conflicting traditions in economic theory

This paper explores the early discussion of external economies in the work of Alfred Marshall and Arthur Pigou. Marshall emphasized external economies as a positive aspect of the market process. Pigou¿s interpretation of externalities has become the standard public finance argument on the existence of market failure, and provides the rationale for proposed policy solutions. An examination of the differences between the two perspectives is subsequently used as the base for a discussion of the modern analysis of research and development, and of the difficulties inherent in the standard Pigovian view. A final substantive section of the paper reconsiders the Marshallian perspective, identifying recent contributions to economic theory that have begun a return to Marshall¿s original interpretation. The conclusion considers the significance of this Marshallian tradition for industrial policy.