Page 206 - The Principle of Economics

210 PART FOUR
THE ECONOMICS OF THE PUBLIC SECTOR
Figure 10-3
TECHNOLOGY SPILLOVERS AND THE SOCIAL OPTIMUM. In the presence of a positive externality to production, the social cost of producing robots is less than the private cost. The optimal quantity of robots, QOPTIMUM, is therefore larger than the equilibrium quantity, QMARKET.
Price of Robot
Value of technology spillover
Equilibrium
Supply (private cost) Social cost
Demand (private value)
Optimum
0 QMARKET
QOPTIMUM
Quantity of Robots
Robots are at the frontier of a rapidly changing technology. Whenever a firm builds a robot, there is some chance that it will discover a new and better design. This new design will benefit not only this firm but society as a whole because the design will enter society’s pool of technological knowledge. This type of positive externality is called a technology spillover.
The analysis of positive externalities is similar to the analysis of negative ex- ternalities. Figure 10-3 shows the market for robots. In this case, the social cost of production is less than the private cost reflected in the supply curve. In particular, the social cost of producing a robot is the private cost less the value of the technol- ogy spillover. Therefore, the social planner would choose to produce a larger quan- tity of robots than the private market does.
In this case, the government can internalize the externality by subsidizing the production of robots. If the government paid firms a subsidy for each robot pro- duced, the supply curve would shift down by the amount of the subsidy, and this shift would increase the equilibrium quantity of robots. To ensure that the market equilibrium equals the social optimum, the subsidy should equal the value of the technology spillover.
CASE STUDY THE DEBATE OVER TECHNOLOGY POLICY
How large are technology spillovers, and what do they imply for public policy? This is an important question because technological progress is the key to why living standards rise from generation to generation. Yet it is also a difficult ques- tion on which economists often disagree.
Some economists believe that technology spillovers are pervasive and that the government should encourage those industries that yield the largest spillovers. For instance, these economists argue that if making computer chips