3a (30%). Suppose that a firm introduces a profitable innovation that reduces pr
ID: 431544 • Letter: 3
Question
3a (30%). Suppose that a firm introduces a profitable innovation that reduces production costs. As a result, rival firms suffer wealth losses, and some will go out of business, although historically, the old production methods usually survive for a time before disappearing completely Show that society receives a net gain from this innovation in the sense that its benefits to society are greater than its costs, even if we don't count the innovator's profits and even if the innovator is able to exercise some market power after innovating. Hint: Think in terms of consumer and producer surplus.) 3b (1000). Given that the net gain to society of the innovation is positive, why might a government still want to suppress the innovation (Hint: Does a government consider all consumer and producer surplus to be equal? How might this relate to the nature of the political system?)Explanation / Answer
Answer to question No.3a:
Innovative products are different from standard products, as they cater to the specific and special needs of the consumers. These products allow the consumers to make optimum use of them. Initially these products are little bit costlier and when they become popular among the consumers, their sales increase and their prices get reduced. e.g. Smartphones. Apple was the pioneer in introducing the smartphones and the consumers started to go gaga over this product as they were able to do many things with this one device, such as, communication, photography, gaming, and it also provided various productive tools. Such innovative products make the life of consumers easier and help them in every walks of life. The innovative products perfectly satisfies the customers as they are designed and customized according to the needs and requirements of the consumers. Let us take another example of automatic washing machines. Earlier, the washing machines were able to wash the clothes only but now, due to innovation, they can wash as well as soak the clothes, thereby saving the time and energy of the users. The innovative products are here to benefit the mankind in many ways by saving their time, reducing their efforts and utilizing their energy for other fruitful and meaningful work.
Answer to question No.3b:
Innovations are meant to benefit the society as well as the businesses also. But any such invention mentioned in question 3a will lead to monopoly of the business and elimination of the competitors. Government may not like such type of economy in the country as this monopoly can affect the political system also. Let us discuss, how? Whenever there is a monopoly of business in any market, the consumers may benefit from their innovative products initially, but as the time goes and there is no competitor to the product, the business is expected to raise the prices of their products gradually, and the cosumers will have no choice but to purchase the product at increased prices. The monopoly will create market imbalance and the trade will be controlled by few businesses that will lead to unfair and unhealthy way of doing businesses and it will breed corruption in the system and adoption of immoral and unethical business practices. To control such instances to happen in the future, the government can put a tap on the prices of the innovative products and can control their production also, to maintain healthy business competition in the market and fair and ethical trade practices. Such move will allow equal opportunities for all the businesses and will ultimately benefit the consumers.
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