A single firm’s innovations in production technology often benefit the production of other firms because these other firms learn about the new technology and can use some of the ideas in their own production.

a. Is there an externality here?

b. How would an economist rank the following two policies in this situation? Why?

i. A tariff on imports, to make sure that domestic production using the new technology occurs.

ii. A subsidy to domestic production, to make sure that domestic production using the new technology occurs.

c. What third policy (a tax or a subsidy to something) would the economist recommend as even better than these two?