4.2
Why is the Romer model incompatible with perfectly competitive markets? Justify using
at most 3 sentences.
The Romer model of endogenous growth, refers to the increasing returns, or profits, for firms
that invest, innovate and accumulate knowledge in the long run. However, the model is
incompatible with perfectly competitive markets, as it falsely assumes that firms have market
power or monopolistic competition in markets of this kind. In perfectly competitive markets
profits, in the long run, are competed away to zero, which consequently means that they are
disincentivised to invest and innovate, rather they need to have market power to incentivise
them, which is found in imperfect competition markets.