Efficiency of Innovations: What are the Practical Implications of the Second Fundamental Theorem of Welfare Economics?

Abstract

The second fundamental theorem of welfare economics suggests that our market economy can be inefficient in non-convex environments. Then, what kind of inefficiencies are we facing? Where can we find them? How can we eliminate them? In this paper, a total surplus analysis is used to show that one of the most serious such inefficiencies is “inactive innovation” and it can be eliminated if buyers of an innovative commodity have a sense of “gratitude” and are willing to pay the prices which are the same as their benefit from the commodity.