Economic Welfare and the Allocation of Resources for Invention

INVENTION is here interpreted broadly as the production of knowledge

K. J. Arrow

2015

Scholarcy highlights

  • INVENTION is here interpreted broadly as the production of knowledge
  • From the viewpoint of welfare economics, the determination of optimal resource allocation for invention will depend on the technological characteristics of the invention process and the nature of the market for knowledge
  • The classic question of welfare economics will be asked here: to what extent does perfect competition lead to an optimal allocation of resources? We know from years of patient refinement that competition insures the achievement of a Pareto optimum under certain hypotheses
  • The model usually assumes among other things, that the utility functions of consumers and the transformation functions of producers are well-defined functions of the commodities in the economic system, and the transformation functions do not display indivisibilities
  • The first seems to be innocuous but conceals two basic assumptions of the usual models. It prohibits uncertainty in the production relations and in the utility functions, and it requires that all the commodities relevant either to production or to the welfare of individuals be traded on the market
  • The first problem has been much studied in the literature under the heading of marginalcost pricing and the second under that of divergence between social and private benefit, but the theory of optimal allocation of resources under uncertainty has had much less attention
  • The production of a given commodity under uncertainty can be described as the production of a vector of commodity-options

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