Tom Gomez 

 October 6, 1986 

 Page -5- 



As the supply curve drops due to adoption by all producers, price 

 declines, quantity increases and producer surplus declines. These 

 changes also occur in New York (see Figure 3c) . 



FIGURE 3c: New York after widespread adoption. 

 New York 



Price 



Supply 1 



Supply 2 



Ql Q2 



Quantity /Time 



Original Producer Surplus = P^^ad 



Producer Surplus after New York adopts, but 

 before rest of producers adopt » P.bd 



Producer surplus after all adopt » P^cd 



If the technological change affects all producers (eventually) in a 

 geographically neutral manner, then New York producer surplus will even- 



tually be lower than originally (i.e., P^cd 



< Pj^ad). 



Are New York producers worse off? If New York producers captured 

 substantial increased profits during the transition process such that 

 subsequent lower profits are offset, then New York may be in aggregate 

 better off. Whether New York producers are better or worse off depends 

 upon the early increase in producer surplus versus the long-term 

 reduction and the length of transition period. 



Are Montana producers worse off? Montana producers are worse off 

 (assuming geographical neutrality) since they probably would not 

 participate in the transitional benefits but would suffer from the 

 eventual decline in producer surplus. 



