Question: Suppose that policymakers, realizing that monopoly power creates distortions, put controls on the prices that patent-holders in the Roomer model can charge for the inputs embodying their ideas. Specifically, suppose they require patent-holders to charge δw(t)/φ, where δ satisfies φ ≤ δ ≤ 1.
a) What is the equilibrium growth rate of the economy as a function of δ and the other parameters of the model? Does a reduction in δ increase, decrease, or have no effect on the equilibrium growth rate, or is it not possible to tell?
(b) Explain intuitively why setting δ = φ, thereby requiring patent-holders to charge marginal cost and so eliminating the monopoly distortion, does not maximize social welfare.