Question

1. Summarize Allen’s claim using the concept of economic rents. Which ceteris paribusassumptions are you making?
2. What other important factors may explain the rise of energy-intensive technologies in Britain in the eighteenth century?

Answer 1

Economics rent is the difference between the benefit received from option taken by a person and benefit he could have achieved from the next best option (opportunity cost or the reservation option) .An economic rent is any payment to an owner of a factor of production in excess of that factor’s opportunity cost.

When we study the way a capitalist economic system promotes technological improvements we assume:

• Prices of all inputs are the same for all firms.
• All firms know the technologies used by other firms.
• Attitudes towards risk are similar among firm owners

This decision rule motivates our explanation of why a firm may innovate by switching from one technology to another. For example there are 5 different combinations of labor and coal to produce 1000 meters of cloth. Firms aim to maximize their profit. This entails producing cloth at the least possible cost. Firms’ choice of technology depends on economic information about relative prices of inputs.Because relative prices of inputs changed, a firm that switches to the new cost-minimizing technology has an advantage over its competitors. The change in profit is equal to the fall in costs associated with adopting the new technology. This is the innovation rent.

Different firms, seeing that first adopter is making monetary rents, will in the long run receive the new innovation. As more firms present the new innovation, the flexibly of material increments and the value begins to fall. The cycle proceeds until everybody is utilizing the new innovation also, nobody is winning development rents. The organizations adhered to the old innovation can't cover their costs at the new lower cost and they fail.

Innovation rent theory explains the rise of energy intensive technologies in Brtain in 18th century

Prior to the Industrial Revolution, making garments for the family were tedious undertakings. By the late nineteenth century, a spinning mule worked by a very modest number of individuals could supplant in excess of 1,000 persons. These machines were fueled by water wheels & coal-fueled steam engines as opposed to utilizing human work.