External effects in the economy and their regulation

Today, the market economy on the territory of the Russian Federation is actively developing. The market is a special sphere of activity, where commodity relations between sellers and buyers are built. Externalities in the market economy play an important role. The relationship between producers and end-users is based on the decentralized mechanism of the price signal.

What are the 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 worries about the well-being of the inhabitants of Russia, therefore controls the activity of producers. All products must be environmentally friendly and produced in accordance with government standards.

With negative externalities, a third person who was not involved in the transaction will incur certain losses. This does not include sellers and buyers. Positive externalities are the gaining of benefits by third parties. The price and market value are the best carriers of information in the field of market economy. Thus, market participants will be able to receive a relevant signal, as well as conduct coordinated efforts. If there is a negative effect on the goods or the provision of services, trading activities will not bring the expected income, and their total value does not reflect the interests of each participant. In this case, market equilibrium will not be optimal.

Actions of negative and positive external effects

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 demand and supply. Demand is the willingness of a buyer 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.

Due to 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 unrecorded interests of third parties, which are called externals.

The role of negative externalities in production

Pollution of the environment 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 waste water into the nearest rivers. There is a release into the atmosphere of a harmful substance such as carbon dioxide. It enters the environment and adversely affects people's health. Because of these phenomena, their interests are significantly infringed upon. Residents of megacities and small towns can not bathe in river water or breathe clean air. Ground areas become infected, and fish die in the water. All these factors and effects are not taken into account in the final price of the products that the factories produce.

That is why it is necessary to take care not only of the quality of the 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, direct and unmediated relationships can be observed, which imply the impact of one agent on the result of the activity of the other. This is the external effects in the economy. It should be noted that such influence can be favorable or unfavorable.

External effects began to be taken into account because each person wants to live in a clean environment. Citizens of the Russian Federation want manufacturers and large factories to be monitored, because emissions can have a negative impact 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 an emergency condition. Negative effects are that during the production process of the goods pollution of the environment occurs.

External Effect Control

In some cases, existing market mechanisms do not provide the necessary resources for a person to be rationally covered by all needs. There are situations between the seller, the buyer and the manufacturer, which are considered to be failed or untenable. In this case, the market can not cope with all the functions assigned to it. It is for this reason that production goods are not fully provided for. External effects in the economy and their regulation is carried out through careful analysis.

Specialists consider the impact of price changes on all market areas of activity. For example, an increase in the output of a brick can significantly affect the manufacture and turnover of concrete. It is for this reason that it is necessary to constantly monitor the consequences of one's own activities. The business entity shall not cause damage to other firms and consumers.

Fee for external effects

The decline in profits in the market can occur in the event that there is no payment for external effects. The payment is not made if the market lacks specific resources or benefits that have caused the external resource.

A huge and important role is played by the payment for external effects in the economy. Examples can be given different, depending on the situation. If the paper mill uses an unlimited amount of clean river water, then executives do not have to buy it. In the end result, there is no payment for the used resource. At the same time, local residents, fishermen or bathers do not have the opportunity 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 it should have free access for everyone. But during the manufacturing process, the paper mill does not take into account all the emerging externalities and is engaged in the production of goods in an inefficient volume.

The Coase Theorem

The problem of externalities in the economy has a traditional approach for further solutions. The American economist and leader Ronald Coase won the title of Nobel laureate in 1991. He wrote an article entitled "The problem of social costs." It clearly identified the problems of externalities, which concern both consumers and producers.

Negative external effect in most cases is manifested during the development of competition between participants who use natural resources. Especially it concerns those cases when each subject has no rights to use a natural source. Nobel laureate and economist Ronald Coase concluded that any external effects can be internalized by attaching ownership rights to specific objects. The process of exchange of ownership of rights can be carried out in the event that they do not entail greater transaction costs. Thanks to this mechanism all aspects of relationships are used to find an effective solution.

Aspects of the theorem of Coase

There are several basic points:

• The cost of the contract between the participants should be low. That is, the fixed amount does not become the main obstacle to the achievement of the specific purpose of the agreement. These negative effects, which imply the appearance of air pollution, affect the overall well-being and health of the inhabitants. That is why it is important for the participants to agree among themselves and solve all the problems.
• The Coase theorem can be put into effect when every owner of an enterprise has the opportunity to identify all sources of damage caused to them by surrounding people. The entrepreneur must independently and legally eliminate the damage, as well as all consequences. When the rights to clean air were 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.

Internalizing the external effect

To force entrepreneurs and business entities to monitor all emissions into the atmosphere, it is necessary to internalize all external effects. Internalization is the complete unification of absolutely all stakeholders.

Today there is another common method that will help an entrepreneur to monitor the cleanliness of the environment. The acting state can be amended by legislative acts so that firms and companies pay all the costs that are required to restore the purity of the surrounding nature.

Corrective tax is imposed on each batch of output of goods, which allows to equalize all marginal private social costs. Thus, you can get the entrepreneur to treat all external costs correctly.