Economic growth and economic development 598

Introduction to Modern Economic Growth given to final good producers would also be useful in increasing the growth rate Moreover, it is noteworthy that as in the first-generation endogenous growth models, a variety of different policy interventions, including taxes on investment income and subsidies of various forms, will have growth effects not just level effects in this framework (see, for example, Exercise 13.11) Naturally, once we start thinking of policy in order to close the gap between the decentralized equilibrium and the Pareto optimal allocation, we also have to think of the objectives of policymakers and this brings us to political economy issues, which are the subject matter of Part For that reason, we will not go into a detailed discussion of optimal policy (leaving some of this to you in Exercises 13.10-13.12) Nevertheless, it is useful to briefly discuss the role of competition policy in models of endogenous technological progress Recall that the optimal price that the monopolist charges for machines is χ= ψ 1−β Imagine, instead, that a fringe of competitive firms can copy the innovation of any monopolist, but they will not be able to produce at the same level of costs (because the inventor has more know-how) In particular, as in the previous chapter, suppose that instead of a marginal cost ψ, they will have marginal cost of γψ with γ > If γ > 1/ (1 − β), this fringe is not a threat to the monopolist, since the monopolist could set its ideal, profit maximizing, markup and the fringe would not be able to enter without making losses However, if γ < 1/ (1 − β), the fringe would prevent the monopolist from setting its ideal monopoly price In particular, in this case the monopolist would be forced to set a “limit price”, exactly equal to (13.23) χ = γψ This price formula follows immediately by noting that, if the price of the monopolist were higher than this, the fringe could undercut and make profits, since their marginal cost is equal to γψ If it were below this, the monopolist could further increase its price without losing any customers to the fringe and make more profits Thus, there is a unique equilibrium price given by (13.23) 584