Increasing Returns And Endogenous Growth: Market Size And Taste For Variety

: This paper studies some implications of the existence of Increasing Returns to Scale in the generation of persistent growth in the economy. In a standard neoclassical one-sector model, the optimal growth rate will be proportional to the rate of population growth. If economies of scale are internal to particular markets and we assume that firms perceive their production functions as CRS, a symmetric equilibrium applied to the model illustrates an example of market failure in promoting its own integration. Steady-state growth may be indeterminate and less than optimal. If one considers that consumers have taste for variety and a multiproduct economy where there are economies of scale internal to each market, one concludes that the equilibrium growth rate maybe higher or lower than optimal. The efficient outcome will lead to higher growth rates for countries with less intense taste for variety and vice-versa.