Today, a market economy is actively developing in the Russian Federation. The market is a special area of activity where commodity relationships are built between sellers and buyers. External effects in a market economy play an important role. The relationship between producers and end users is based on a decentralized price signal mechanism.
What are external effects?
The economy is a set of relations that are formed in the production, distribution and consumer systems. External effects in the economy are the influence of the activity of a specific agent who is worried about the welfare of the inhabitants of Russia, therefore, controls the activities of manufacturers. All products must be environmentally friendly and produced in accordance with state standards.
In case of negative external effects, a third party who was not involved in the transaction will incur certain losses. This does not include sellers and buyers. Positive external effects are the receipt of benefits by third parties. Price and market value are the best information carriers in the field of market economy. Thus, participants in market relations will be able to receive a relevant signal, as well as carry out coordinated efforts. If there is a negative effect from the product or the provision of services, trading activities will not bring the expected income, and their total value will not reflect the interests of each participant. In this case, the market balance will not be optimal.
The effects of negative and positive external effects
In order to maximally correctly assess the influence of the external effect on the current market equilibrium, it is necessary to draw up an accurate schedule of supply and demand. Demand is the buyer's willingness to pay the cost of a product or service. He can choose from a variety of options to satisfy his consumer interest. Thus, all private marginal benefits are displayed.
Thanks to the turnover, sellers have the opportunity to reflect all the costs for the analysis of the production process. External effects in a market economy contribute to the determination of unaccounted interests of third parties, which are usually called externs.
The role of negative external effects in production
Environmental pollution is harmful to human health. And first of all, the influence of such an industry as the economy was noted. The negative external effect is that most large industrial plants sin by draining sewage into nearby rivers. A harmful substance such as carbon dioxide is released into the atmosphere. It enters the environment and negatively affects the well-being of people. As a result of these phenomena, their interests are significantly infringed. Residents of cities and small towns cannot swim in the river water or breathe clean air. Land plots become infected, and fish die in the water. All of the listed factors and effects are not taken into account in the final price of the products that the plants produce.
That is why it is necessary to take care not only of the quality of manufactured products, but also to monitor the cleanliness of the environment. The release of harmful substances into the atmosphere and water entails serious consequences.
The concept of external effects in the modern world
Today in market relations one can observe direct and unmediated connections, which imply the influence of one agent on the result of another. These are external effects in the economy. It is worth noting that such an effect can be favorable or unfavorable.
External effects began to be taken into account because everyone wants to live in a clean environment. Citizens of the Russian Federation want manufacturers and large factories to be controlled, because emissions can have a negative effect on the general condition of other people.
External effects in the economy can develop between consumers and producers of goods. An example of a positive effect is the exterior decoration of buildings so that they have a well-groomed and attractive appearance. Passers-by will be able to admire the facade and not worry that it is in disrepair. The negative effects are that during the production process of goods environmental pollution occurs.
Adjustment of external effects
In some cases, existing market mechanisms do not provide the necessary resources for a person to rationally cover all needs. Situations arise between the seller, the buyer and the manufacturer, which are considered to be failed or insolvent. In this case, the market cannot cope with all the functions assigned to it. It is for this reason that production benefits are not fully ensured. External effects in the economy and their regulation is carried out with the help of a thorough analysis.
Specialists consider the impact of price changes on all market areas of activity. For example, an increase in the volume of bricks produced may significantly affect the manufacture and turnover of concrete. For this reason, it is necessary to constantly monitor the consequences of their own activities. The business entity must not harm other firms and consumers.
Fee for external effects
A decrease in profit in the market may occur when there is no payment for external effects. Payment is not made if there are no specific resources or benefits on the market that have caused the realization of an external resource.
A huge and important role is played by the payment for external effects in the economy. Different examples can be given, depending on the situation. If a paper mill uses an unlimited amount of clean river water, then managers do not have to buy it. In the end result, no payment is made for the used resource. At the same time, local residents, fishermen or bathers are not able to use the river for their own purposes. In this case, the river water becomes limited for use, because it does not have an owner and should have free access for everyone. But during the production process, the paper mill does not take into account all the external effects that arise and is engaged in the production of goods in an inefficient volume.
Coase's theorem
The problem of external effects in the economy has a traditional approach for further solutions. American economist and activist Ronald Coase in 1991 received the title of Nobel laureate. He wrote an article entitled "The Problem of Social Costs." It clearly identified the problems of external effects that affect both consumers and manufacturers.
A negative external effect in most cases manifests itself during the development of competition between participants who use natural resources. This is especially true in cases where each entity lacks the right to use a natural source. Nobel laureate and economist Ronald Coase concluded that any external effects can be internalized by securing ownership of specific objects. The process of exchanging ownership of rights can be carried out in the case when they do not entail large transaction costs. Thanks to this mechanism, all sides of the relationship are involved in order to find an effective solution.
Aspects of Coase's theorem
There are several main points:
- The cost of the contract between the parties should be low. That is, the established amount does not become the main obstacle to achieving the specific goal of the agreement. These negative effects, which imply the appearance of air pollution, affect the general well-being and health of residents. That is why it is important for participants to agree among themselves and solve all problems.
- Coase's theorem can be activated in the case when each owner of the enterprise has the opportunity to identify all the sources of damage they cause to those around him. The entrepreneur must independently and legally eliminate the damage, as well as all the consequences. When the rights to clean air have been legislated, it becomes difficult to determine whose production activities violate the agreement. External effects in the Russian economy will help entrepreneurs avoid the occurrence of an ozone hole and acid rain in the atmosphere.
