Conceptual and Policy Implications: Concluding Discussion

The issue of increasing returns will be constantly raised because a neat general solution is lacking and many different outcomes are possible. Increasing returns are also prevalent in the real economy for a number of reasons discussed in Chapter 1. However, the introduction of increasing returns plays havoc to many basic tenets of traditional economic theory. This is probably an important reason why increasing returns have not been discussed more often, especially in the classroom. It is well known that the presence of increasing returns may no longer make the market equilibrium perfectly Pareto optimal. It is less well known that it also makes pecuniary external effects having efficiency implications and, together with the related imperfect competition, it makes money possibly non-neutral, as discussed in Chapter 2. However, productively efficient general equilibrium may exist in an economy with imperfectly competitive firms that price at average costs in equilibrium (Chapter 4). Nevertheless, encouraging the expansion of a sector with a higher degree of increasing returns is efficiency-improving (Chapter 5).