Allocative and productive efficiency are static concepts in the sense that they relate to welfare at a point in time. Allocative and productive efficiency reflect the outcome at a single point in time of resource allocation and production decisions.

In this paper we investigate the trade-off faced by regulators who must set a price for an intermediate good somewhere between the marginal cost and the monopoly price. We utilize a growth model with monopolistic suppliers of intermediate goods. Investment in innovation is required to produce a...