Today the market economy is actively developing on the territory of the Russian Federation. The market is a special area of activity where commodity relations are built between sellers and buyers. Externalities in a market economy play an important role. The relationship between producers and end consumers is based on a decentralized price signal mechanism.
What are spillovers?
Economy is a set of relationships that develop in the production, distribution and consumer systems. Externalities in the economy are the impact of the activities of a particular agent who is concerned about the well-being of the inhabitants of Russia, and therefore controls the activities of producers. All goods must be environmentally friendly and produced in accordance with government standards.
With negative externalities, a third party that was not involved in the transaction will incur certain losses. This does not include sellers and buyers. Positive externalities are the gains made by third parties. Price and market value are the best information carriers in the fieldmarket economy. Thus, market participants will be able to receive a relevant signal, as well as conduct a coordinated effort. 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 cost will not reflect the interests of each participant. In this case, the market equilibrium will not be optimal.
Activities of negative and positive externalities
In order to 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 willingness of a buyer to pay for a product or service. He can choose from a variety of options to suit his consumer interest. Thus, all partial marginal benefits are displayed.
Thanks to the turnover, sellers have the opportunity to reflect all costs for the analysis of the production process. Externalities in a market economy contribute to the definition of unaccounted for interests of third parties, which are commonly called externals.
The role of negative externalities in production
Environmental pollution is harmful to human he alth. And first of all, the influence of such an industry as the economy is noted. The negative externality is that most large industrial plants are responsible for discharging wastewater into nearby rivers. There is a release into the atmosphere of such harmfulsubstances like carbon dioxide. 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 megacities and small towns cannot bathe in river water or breathe clean air. Ground areas become infected, and fish die in the water. All of the above factors and effects are not taken into account in the final price of products produced by factories.
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 externalities in the modern world
Today, in market relations, one can observe direct and indirect connections, which imply the impact of one agent on the result of the activity of another. These are the externalities in the economy. It is worth noting that such influence can be favorable or unfavorable.
Externalities are 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 impact on the general condition of other people.
Externalities 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-bypeople 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.
Control of external effects
In some cases, existing market mechanisms do not provide the necessary resources for a person to rationally cover all needs. There are situations between the seller, the buyer and the manufacturer, which are considered failures or insolvent. In this case, the market cannot cope with all the functions assigned to it. It is for this reason that productive goods are not provided in full. Externalities in the economy and their regulation are carried out through careful analysis.
Specialists consider the impact of price changes on all market areas of activity. For example, an increase in the volume of bricks produced can significantly affect the production and turnover of concrete. It is for this reason that it is necessary to constantly monitor the consequences of one's own activities. A business entity should not cause damage to other firms and consumers.
Externality fee
Decrease in profits in the market can occur when there is no externality fee. Payment is not made if there are no specific resources or goods on the market that caused the implementation of the externalresource.
A huge and important role is played by the payment for external effects in the economy. There are different examples, depending on the situation. If a paper mill uses an unlimited amount of pure river water, then managers do not have to buy it. As a result, no payment is made for the resource used. At the same time, local residents of the city, fishermen or bathers do not have the opportunity to use the river for their own purposes. In such a case, river water becomes limited for use, because it has no owner and must have free access for everyone. But during the production process, the paper mill does not take into account all the externalities that arise and produces goods in an inefficient volume.
Cose Theorem
The problem of externalities in the economy has a traditional approach for further solution. American economist and activist Ronald Coase in 1991 received the title of Nobel laureate. He wrote an article titled "The Problem of Social Costs". It clearly identified the problems of externalities that affect both consumers and producers.
Negative externality in most cases manifests itself during the development of competition between participants who use natural resources. This is especially true in cases where each subject does not have the right to use a natural source. Nobel laureate and economist Ronald Coase concluded that anyexternalities can be internalized by assigning 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 parties to the relationship are involved in order to find an effective solution.
Aspects of the Coase Theorem
There are several main provisions:
- The cost of the contract between the participants should be low. That is, the fixed amount does not become the main obstacle to achieving the specific goal of the agreement. These negative effects, which imply the appearance of atmospheric pollution, affect the general well-being and he alth of the inhabitants. That is why it is important for the participants to agree among themselves and solve all problems.
- The Coase theorem can be activated when each owner of the enterprise has the opportunity to identify all the sources of damage caused by them to the people around them. The entrepreneur must independently and legally eliminate the damage, as well as all consequences. Once clean air rights have been legislated, it becomes difficult to determine whose manufacturing activities are violating the agreement. Externalities in the Russian economy will help entrepreneurs avoid the ozone hole and acid rain in the atmosphere.
Internalizing external effect
To force entrepreneurs and businesses to keep track of all emissionsinto the atmosphere, all external effects must be internalized. Internalization is the complete unification of absolutely all actors.
Today, there is another common way that will help the entrepreneur to keep the environment clean. Legislative acts can be amended by the current state so that firms and companies pay all the costs that are required to restore the purity of the environment.
A corrective tax is imposed on each batch of output, which allows you to equalize all marginal private social costs. In this way, the entrepreneur can be forced to treat all external costs correctly.
