Externalities - what is it? Why do they need to be composed? What are they like? These, as well as a number of other questions, will be answered in the framework of the article.
general information
What are externalities? This name is for situations where the benefits or costs of market transactions are not taken into account in the price. What does this mean? If simpler, they give a certain effect. And what can externalities provide us with? Positive and negative points are their influence. What does this mean in practice? By this we mean situations when there are positive or negative moments of the activity of one subject for other persons. What will help us better understand what externalities are? Examples!
Let's say we have a cement plant. It emits into the atmosphere. Thus, we can talk about a clear negative for local residents. But if this very plant paves a good and high-quality road, then there will be a positive external effect. Although if this could be finished, this article would not have been written. Externalities are a very broad topic.
Benefits and Costs
They are key objects. Conventionally, marginal social and private benefits and costs can be distinguished. Most often, the cause of external effects is the existence of a certain mismatch between these values.
Let's look at another example. Suppose two entities entered into an agreement between themselves. And its costs are borne by third parties who do not accept activity under existing agreements. Back to our cement factory. It generates negative externalities. There is no need to talk about their complete elimination. But when paying for social costs, the level of influence will decrease. So, the paved road is one moment. If the plant sends at its own expense residents of the environs to rest (considering the example of the USSR, where workers often went to sanatoriums), then this is another matter. But in the second case, such a negative effect arises as an increase in the cost of cement, the ability to compete with other subjects of economic activity decreases, and production volumes decrease. Such features are an integral part of modern capitalism.
About the degree of satisfaction
When external effects occur, externalities do not always work with equal effectiveness. So, if a cement plant was built in a village, from which there are ten kilometers to a normal road, then this is one thing. And if it is within the city, where the infrastructure is well developed, it’s completely different. The influence exerted depends on a large number of factors. An example is scale. So, if a cement plant will raise a large amount of dust and cause a lot of inconvenience, then this is one thing. But if it has working rooms equipped with filters, and there are numerous forest belts around, this is completely different. Yes, this cement plant will cause certain inconveniences, but on a small scale. In which case, the situation can be adjusted by the state by levying an environmental tax and directing it to various initiatives that will reduce marginal private costs and negative external effects.
The effectiveness of compensation measures
The effect can be quite controversial and doubtful. So, let's look at alcohol. No one doubts that it is harmful and does not bear any benefit. Nevertheless, they are very actively traded. However, there is no guarantee that a third party will not suffer from consumption. Let's say an alcoholic got drunk and broke someone’s nose. Bad? Of course! But what about compensation? The legislation provides that this aspect is assigned to the defendant, that is, that same alcoholic. But there is also a second side - the manufacturer! Various excise taxes are being collected from him, which are used to carry out an anti-alcohol campaign, campaigning for a healthy lifestyle, assistance with rehabilitation, and more. But, alas, judging by the fact that we occupy leading positions in terms of alcohol consumption, they are not very effective. Therefore, the sale of alcohol for subsequent consumption is a rather controversial point in terms of cost recovery.
Public goods
But bad enough, let's talk about positive externalities. If there is a certain benefit and there is no possibility or it is inexpedient to force people to pay for it, then it becomes public. Here, its scale is also important. The most positive is the pure public good. This is the name of the effects that are used by all people, regardless of whether they pay it or not.
As an example, take clean air or the forest. A feature of a pure public good is two properties at once: non-selectivity and non-exclusion. Whatever the conditions, each person is free to use the same air. True, in certain cases, negative effects can occur.
Take the law enforcement system. She works at the expense of tax revenues. If, however, a certain subject of economic activity appears, which evades their payment, then the problem of a fare dodger arises. Such a situation is disadvantageous for the rest of society, but the law must be maintained. Why he does not pay taxes should worry the fiscal service. While the violation of the law in another matter should not go unnoticed for the reason that everyone is equal before him and there are no exceptions.
Externalities in the economy
This is a rather interesting topic, which should be given more attention if possible. But for now, let's get by with one subheading. I would like to note that at the same time it is rather difficult to find a sphere that would be the best illustration of the process under consideration. Economic externalities can take many forms and influence people in many ways. The road example discussed earlier is only a small part.
So, the manifestation of externalities can also be considered as entrepreneurs taking on certain social obligations, such as repairing a kindergarten, school, opening playgrounds, unauthorized dumping of garbage for residential buildings, and much more. You can also remember about specific activities like beekeeping. So, a person is engaged in entrepreneurship and cares first of all about himself. But thanks to him, bees pollinate trees in neighboring areas, people get honey. True, they can also bite in case of aggression by humans to insects. These are externalities, positive and negative.
