This research explores the economic risks of rapid AI adoption, specifically focusing on a market failure where firms automate beyond optimal levels. The research argues that competitive pressure forces companies into an automation arms race, as individual firms prioritize cost savings while ignoring the collective loss of consumer purchasing power. While strategies like employee retraining, profit-sharing, and transparent communication can mitigate harm, the research suggests they are insufficient to stop this self-destructive cycle. To address this strategic externality, the research proposes a shift toward policy interventions, such as specific automation taxes. Ultimately, the work highlights how excessive substitution of human labor may paradoxically erode the very market demand that sustains corporate profits.

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