Externalities are Positive and negative externalities, examples

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:47

Externalities - what is it? Why should they be compiled? What are they like? These and a number of other questions will be answered within the framework of the article.

General information

What are externalities? This is a name for situations where the benefits or costs of market transactions are not included in the price. What does this mean? If simpler, then they give a certain effect. And what can externalities provide us with? Positive and negative moments - that's their impact. What does this mean in practice? This is understood as situations when there are positive or negative aspects of the activity of one subject for other persons. What will help us understand better what externalities are? Examples!

Let's say we have a cement plant. It releases into the atmosphere. Thus, we can talk about a clear negative for local residents. But if this same plant lays a good and high-quality road, then there will be a positive external effect. Although if it were possible to end here, then this article would not be written. Externalities are a very broad topic.

Benefits and costs

They are key objects. It is conditionally possible to single out marginal social and private benefits and costs. Most often, the cause of external effects is the existence of a certain discrepancy between these values.

Let's look at another example. Suppose two entities entered into an agreement with each other. And its costs are borne by third parties who are not active under existing agreements. Let's go back to our cement plant. It generates negative externalities. There is no need to talk about their complete elimination. But when paying social costs, the level of influence will decrease. So, the paved road is one moment. If the plant sends residents of the surrounding area to rest at its own expense (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 economic entities decreases, and production volumes decrease. Such features are an integral part of modern capitalism.

About satisfaction

When externalities appear, externalities do not operate with the same efficiency everywhere. So, if a cement plant was built in a village, from which 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 is quite another. The effect that is exerted depends on a large number of factors. ATscale is an example. So, if a cement plant raises a lot of dust and causes a lot of inconvenience, then this is one thing. But if he has working rooms equipped with filters, and there are numerous forest belts around, this is completely different. Yes, this cement plant will cause some inconvenience, but on a small scale. In which case, the situation can be corrected by the state by levying an environmental tax and directing it to various initiatives that will reduce marginal private costs and negative externalities.

Effectiveness of compensation measures

The effect can be quite controversial and dubious. So let's look at alcohol. No one doubts that it is harmful and does not bring any benefit. Nevertheless, they are very actively traded. However, there is no guarantee that a third party will not suffer from the use. Let's say an alcoholic gets drunk and breaks someone's nose. Badly? Undoubtedly! But what about compensation? The legislation provides that this aspect is assigned to the defendant, that is, the same alcoholic. But there is also another side - the manufacturer! Various excise taxes are collected from him, which are used to conduct an anti-alcohol campaign, agitation for a he althy lifestyle, assistance with rehabilitation, and so on. But, alas, judging by the fact that we occupy a leading position in terms of alcohol consumption, they are not very effective. Therefore, the sale of alcohol for the purpose of subsequent consumption israther controversial point in terms of cost compensation.

Public goods

But enough of the bad, let's talk about positive externalities. If there is a certain good and it is not possible or inappropriate to force people to pay for it, then it becomes public. Here, too, the scale is important. The most positive is a pure public good. This is the name of the effects that are used by all people, regardless of whether they pay for it or not.

As an example, take clean air or a forest. A feature of a pure public good is two properties at once: non-selectivity and non-excludability. Whatever the conditions may be, each person can freely use the same air. True, in certain cases, negative effects may occur.

Take the law enforcement system. It operates on tax revenue. If a certain subject of economic activity appears, which evades paying them, then the problem of a free rider arises. This situation is disadvantageous for the rest of society, but the maintenance of the law must be carried out. Why he does not pay taxes should worry the fiscal service. Whereas a 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 that should be given as much attention as possible. But for now, let's get by with onesub title. 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 affect people in many ways. The road example discussed earlier is just a small part.

Thus, the assumption of certain social obligations by entrepreneurs, such as repairing a kindergarten, a school, opening playgrounds, unauthorized dumping of garbage under residential buildings, and much more, can also be considered a manifestation of externalities. You can also remember about specific activities like beekeeping. So, a person is engaged in entrepreneurship and takes care of himself first of all. But thanks to him, bees pollinate trees in neighboring areas, people get honey. True, they can also bite in case of human aggression towards insects. These are positive and negative externalities.

Conclusion

How big the topic is and how much I would like to talk about it more. We can think of education, which brings up highly cultured people, which harm the environment and other people less, and tourism, which has a positive effect on he alth and the economy, and the economic sector, where qualified people with higher education can create more and more complex and perfect things. True, we should not forget that externalities are also negative aspects, but who said that comfort can be achieved without difficulty?