Welfare Effects of Mechanization: Monopoly and Indivisibility (Review Article, Note, Comment)

Discussions of the economic effects of mechanization in less developed countries typically lead to the conclusion that private decision-making leads to over-investment in machinery. This conclusion normally rests on welfare analyses implying that the net private benefits from mechanization exceed its net social benefits. The sources of divergence between private and social benefits commonly include the fact that private calculations take no account of the adverse impact that mechanization may have on income distribution. Moreover, it is often claimed that the market prices on which these private calculations are based are distorted in such a way as to make mechanization privately profitable well beyond the point where its net social returns become negative. The reasons for this include suppression of interest rates, overvalued exchange rates and minimum wage laws: see, for example, [2;3;4;5].