
Contents
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Optimal Resource Allocations with Learning: Basic Intuition Optimal Resource Allocations with Learning: Basic Intuition
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Theory of the Second Best Theory of the Second Best
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Outline of the Analysis Outline of the Analysis
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Basic Model Basic Model
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Dynamic Development Dynamic Development
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Basic Analytics: Inefficiency of Unfettered Markets Basic Analytics: Inefficiency of Unfettered Markets
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Formal Proof Formal Proof
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Optimal Interventions Optimal Interventions
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No Lump Sum Taxes No Lump Sum Taxes
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Market Structure and Innovation Market Structure and Innovation
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Analytics Analytics
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Concluding Comments Concluding Comments
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Appendix A A Simple Model of Investment in R & D Appendix A A Simple Model of Investment in R & D
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The Role of Spillovers The Role of Spillovers
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Comparison with a Market Economy Comparison with a Market Economy
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Seven Learning in a Closed Economy—the Basic Model
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Published:June 2014
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Abstract
This chapter examines learning in a closed economy using a two-good (agriculture and manufacturing) closed economy model. It explains how policies promoting the industrial sector lead to higher rates of growth and welfare. It shows that even if there is more innovation under monopoly, it does not mean that welfare is higher. Society pays a cost from the monopoly distortions. Only if the dynamic benefits are large enough to offset the static distortions is monopoly preferable to a competitive equilibrium. Thus, Schumpeter's enthusiasm for monopoly is not justified; one can do better by government intervention—imposing a subsidy on the learning sector, paid for either by a tax on the other sector or, if feasible, by a lump sum tax.
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