When Solutions Are Abundant but Problems Scarce: AI in the Market for Knowledge

Felix Zhiyu Feng, Brett Green, Curtis R. Taylor, and Mark M. Westerfield
Working Paper, September 2026

[PDF] [SSRN Version]

Summary

When AI makes solutions abundant, unsolved problems become the scarce input. In our general-equilibrium model, AI finds or solves problems. It splits firms’ knowledge hierarchies, and smarter or cheaper AI can lower welfare by intensifying congestion in problem finding. Taxing finding, not AI, restores efficiency.

Abstract

We study how artificial intelligence affects welfare in general equilibrium when production requires both finding and solving problems. Unsolved problems are unexploited opportunities or unmet needs that agents find in a congested sector. Problems are solved in layered hierarchies in which agents can ask for help. Firms may adopt a replicable AI agent in either activity. AI deployed in solving problems splits the human knowledge hierarchy: greater AI capability affects the layers above AI, whereas lower cost affects the layers below it. Either form of progress can lower welfare by reallocating solvers to the congested finding sector. A tax on finding corrects this distortion; when this is not possible, the optimal tax on AI can be positive or negative, depending on its effect on the congestion externality.

Cite as

Feng, Felix Zhiyu, Brett Green, Curtis R. Taylor, and Mark M. Westerfield. 2026. “When Solutions Are Abundant but Problems Scarce: AI in the Market for Knowledge.” Working paper, September 2026.

BibTeX

@unpublished{FengGreenTaylorWesterfield2026AI,
  author = {Feng, Felix Zhiyu and Green, Brett and Taylor, Curtis R. and Westerfield, Mark M.},
  title  = {When Solutions Are Abundant but Problems Scarce: AI in the Market for Knowledge},
  note   = {Working paper},
  month  = {September},
  year   = {2026},
  url    = {https://markwesterfield.com/papers/FGTW-AI-Knowledge.html}
}

This is a working paper; the posted PDF is the September 2026 draft. Updated October 5, 2026.