Technological Externalities and Resource Allocation

Abstract

This paper is an examination of the effects on resource allocation of technological externalities within a given industry. A competitive equilibrium in the presence of technological externalities in production is compared with a Pareto optimum in terms of input use and final outputs of the economy. Resource allocation with technological externalities and imperfect competition is also compared with the competitive and Pareto-optimal solutions. It is shown that standard theory's approach for comparing resource use requires extremely restrictive assumptions and, in general, can lead to significant errors.