DISCUSSION: Railroads are an example of an industry with increasing returns to scale, i.e. the pin factory idea.
The example shows that economists were aware that increasing returns existed. They just didn’t pay much attention to increasing returns because they couldn’t model them.
- There’s no ambiguity in the invisible hand. It’s perfectly clear. And, railroads referred to the pin factory idea, not the invisible hand.
- We have no idea why the pin factory was hard to model.
- Railroads are just an example of increasing returns. The passage doesn’t say that such industries are becoming more common.
- CORRECT. Yes. The pin factory model is a better description of railroads. They don’t follow the invisible hand model, because railroads tend towards monopoly.
- Increasing returns often lead to monopoly, not competition. See lines 25-26.
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