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Technical Change, Pecuniary Externality and the Market Failure

  • Hom M. Pant

    (University of Tasmania)

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    First, a small open economy is analyzed to show that even a complete and competitive market may fail to produce Pareto-efficient outcomes under conditions of changing technology. It is mainly because price- taking agents can make the prices they face by changing their technology or technique of production. It is then shown that this result holds equally true for the regional sub-economies of this economy. A legal provision of R&D tax/subsidy based on payroll changes is shown to be a second best policy that corrects the market failure with a small dead- weight loss. This policy does not require actual tax collection or subsidy payment and may be used by regional governments to correct technological market failure at regional levels. The provision improves the functioning of the market by eliminating the mismatch between the type of production sector and the type of technological/technical change they introduce.

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    Paper provided by EconWPA in its series GE, Growth, Math methods with number 9609001.

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    Length: 20 pages
    Date of creation: 27 Sep 1996
    Date of revision: 29 Sep 1996
    Handle: RePEc:wpa:wuwpge:9609001
    Note: Type of Document - Word 7.0; prepared on IBM PC ; to print on HP LaserJet 4; pages: 20; figures: included
    Contact details of provider: Web page: http://econwpa.repec.org

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    1. Tibor Scitovsky, 1954. "Two Concepts of External Economies," Journal of Political Economy, University of Chicago Press, vol. 62, pages 143.
    2. Makowski, Louis & Ostroy, Joseph M, 1995. "Appropriation and Efficiency: A Revision of the First Theorem of Welfare Economics," American Economic Review, American Economic Association, vol. 85(4), pages 808-27, September.
    3. Ng, Yew-Kwang, 1983. "Rents and Pecuniary Externalities in Cost-Benefit Analysis: Comment," American Economic Review, American Economic Association, vol. 73(5), pages 1163-70, December.
    4. Scotchmer, Suzanne, 1986. "Local public goods in an equilibrium : How pecuniarv externalities matter," Regional Science and Urban Economics, Elsevier, vol. 16(4), pages 463-481, November.
    5. Loong, Lee Hsien & Zeckhauser, Richard, 1982. "Pecuniary Externalities Do Matter When Contingent Claims Markets Are Incomplete," The Quarterly Journal of Economics, MIT Press, vol. 97(1), pages 171-79, February.
    6. Foster, Edward, 1983. "Rents and Pecuniary Externalities in Cost-Benefit Analysis: Reply," American Economic Review, American Economic Association, vol. 73(5), pages 1171-72, December.
    7. Wildasin, David E, 1988. "Indirect Distributional Effects in Benefit-Cost Analysis of Small Projects," Economic Journal, Royal Economic Society, vol. 98(392), pages 801-07, September.
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