Economic Welfare and the Allocation of Resources for Invention

by Kenneth Arrow

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A discourse on invention, defined broadly as the production of knowledge. From the viewpoint of welfare economics, determining optimal resource allocation for invention will depend on the technological characteristics of the invention process and on the nature of the market for knowledge. It is shown that the competitive system fails to achieve an optimal resource allocation in the case of invention because of increasing returns, inappropriability, and uncertainty. For an optimal allocation to invention, it is necessary for the government or some other agency not governed by profit-and-loss criteria to finance research and invention.

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