point increases its net gains. Beyond that point it lessens them.

[Illustration]

Now, even the interest of the monopoly itself would lead it to give
the public some benefit from every economy that it makes. This is
because the amount of output that will yield a maximum of profit at a
certain cost of production is not the same that will yield the maximum
of net profit when the cost is lower. Every fall in cost makes it for
the interest of the monopoly to enlarge its output somewhat, but by no
means as much as competing producers would enlarge theirs. It will
always hold the price well above the level of cost. In the
accompanying figure distance along the line _AK_ represents the amount
of goods produced, while vertical distance above the line measures
costs of production, as well as selling prices, and the descending
curve _FJ_ represents the fall of prices which takes place as the
output of the goods is increased. Now, when the cost of production
stands at the level of the line _CI_, the amount of output that will
yield the largest amount of net profit is the amount represented by
the length of the line _AM_. That amount of product can be sold at the
price represented by the line _MG_. The gross return from the sale
will be expressed by the area of the rectangle _AEGM_, and the area
_CEGN_, which falls above the line of cost, _CI_, is net profits. They
are larger than they would be if the line _MG_ were moved either to
the right or to the left, _i.e._, if the amount of production were
made either larger or smaller. Now, if the cost of production falls to
the level of the line _BJ_, it will be best to increase the output
from _AM_ to _AL_. The whole return will then be represented by the
rectangle _ADHL_, and the area _BDHO_ represents profits, with the
cost at the new and lower level. These are somewhat larger than they
would be if the output continued to be only the amount _AM_. Under
free competition the price would fall to the line _BJ_, the net
profits would disappear, and the public would have the full benefit of
the improvement in production.

_The Purpose of the System of Patents._--Patents are a legal device
for promoting improvements, and they accomplish this by invoking the
principle of monopoly which in itself is hostile to improvement. They
do not as a rule create the exclusive privilege of producing a kind of
consumers' goods, but they give to their holders exclusive use of some
instrumentality or some