3a. (30%). Suppose a firm introduces a profitable innovation that reduces production costs. As a result, rival firms suffer wealth losses, and some will go out of business, although historically, the old production methods usually survive for a time before disappearing completely
Show that society receives a net gain from this innovation in the sense that its net benefits to society are positive, even if we don't count the innovator's profits and even if the innovator is able to exercise some market power after innovating (Hint: Think in terms of consumer and producer surplus.)
3b. (10%). Given that the net benefits of the innovation are positive, why might a government still want to suppress the innovation? (Hint: Does a government consider all consumer and producer surplus to be equal? How might this relate to the nature of the political system?)