1. . The impact may be negative, if it is expressed in a decrease in the utility of some consumer or the output of some firm. In this case they talk about negative externality, and the decrease in utility or output is considered external costs of this type of activity.

Most obvious example negative effects is environmental pollution. If a chemical plant discharges its waste into a river, it leads to an increase in human illness due to deterioration in water quality. If consumers want to purify water, this requires expense. In both cases, there is an increase in the monetary costs of consumers and (or) a decrease in their level of utility.

2. Positive externalities. The impact may be positive, if it is expressed in an increase in the utility of a third-party consumer or the firm's output. In this case they talk about positive externality, and the increase in utility or output is considered external benefits of this type of activity.

For example, the Leningrad Optical-Mechanical Association, whose territory is separated from the main city highways by railroad, at one time built an underground passage under the tracks that all citizens could use. As a result, their level of usefulness has increased.

Negative externalities- negative impacts on third parties. For the manufacturer, they manifest themselves in the need for additional use of resources. For the consumer, these are inconveniences that are not compensated for by anyone. In conditions of limited resources, externalities arise due to competition between in various ways resource use. The reason for such competition lies in the lack of established property rights to this resource, which allows it to be used for free. If property rights to a resource were established, for example, the right of the population to clean air, then they could be sold to a metallurgical enterprise (negative externality)

Internalization is an economic strategy aimed at reducing or eliminating negative external effects by turning them into internal ones.

Coase theorem- the theorem according to which, at zero transaction costs, the market copes with any external effects.

Internalization of externalities

This is the translation of external effects into internal ones. This is achieved by adjusting the MPCs so that they reflect the actual MSCs.

Internalization of a negative external effect leads to an increase in the price of the product that generates this effect and a decrease in demand.

Internalization of positive externalities should lead to increased consumption.

Adjustment taxes and adjustment subsidies are used to internalize externalities.

1) Corrective tax (T) is a tax on the output of a good or service that raises the MPC to the level of MSC.

The tax is set at MEC = T. This internalizes the negative externality. MSC=MPC+T

The price of the goods sold increases until it becomes equal to the MSC of production of this product(t.B), but according to the law of the market, the volume of demand decreases.

The established price P 2 leads to a fall in the volume of demand. After paying the MEC tax, producers receive revenue in the amount of MPC (P 3).

Tax collection in the amount of MEC∙Q 2 = (P 2 - P 3)∙Q 2 compensates for damage caused to third parties.

The external effect is internalized (incorporated into the internal costs of the parties to the transaction).

Corrective subsidies (S) are payments to consumers or producers of goods, the consumption of which creates a positive external effect (in the figure, move prices down one position)

The subsidy is designed to internalize the externality by exerting a downward effect on the price of consumption of the good that increases its output to effective level. The subsidy will cause a shift in the demand curve for education (like the MPB that each student personally receives from education). MSB = MPB + MEB(S). The net gain from an increase in the contingent is represented by the area ABC.

So, negative externalities arise as a result of competition between various options use of resources in the event that ownership rights to each of the options are not secured.

In the presence of negative externalities, the question arises whether sellers and buyers (participants in the transaction) have the right to shift costs to third parties, for example, to dump waste into a river without paying for the acquisition of this right. The problem is that water resources belong to no one. Since ownership of the river is not established, firms can dump waste into it for free.

Theorem of Roynald Coase (Prof. University of Chicago)

Establishes a link between externalities and property rights.

1. To internalize externalities (translate them into internal ones), it is important to clearly define property rights.
2. Transaction costs in establishing property rights and selling them should be negligible (protracted disputes about the use of resources and property rights reduce overall efficiency).

According to Coase theory, with negligible transaction costs, externalities can be internalized by the government establishing property rights to resources and allowing those rights to be freely exchanged.

It does not matter to whom these property rights are transferred. With a free exchange of rights, the resulting distribution of resources will be the same.

The importance of Coase theory

External effects (externalities, pollution) arise when there are disagreements in relations regarding property rights. When it is clear who has property rights and who should pay whom for the right to use resources, externalities can be eliminated through negotiation. In general, negotiations are possible when the number of participants is small. No government intervention is required here. The costs associated with negotiations should be small, external effects should be easily eliminated. The function of the state is only to establish rights. Once these rights are established, people can sell them, allowing externalities to be internalized.

But the Coase theorem does not apply if the costs of negotiations are so high that they exceed the benefits of these negotiations. Motorists park (drive) near your home, you suffer from air pollution. Who will you negotiate with? There are too many motorists.

Difficulties arise in compensating for negative external effects. External effects are difficult to eliminate, since there are many sources of negative effects. Private negotiations will not help.

Inevitable by-product production process pulp and paper mills - chemical compound, called dioxide. Scientists believe that when entering environment, dioxide increases the likelihood of cancer, birth defects, leads to other problems.

Is paper production associated with environmental dioxide pollution? social problem? If you consider the market allocation of scarce resources using forces and supply, you will see that when supply and demand are in equilibrium, resources are usually allocated efficiently. "The Invisible Hand" market brings buyers and sellers pursuing purely personal goals into the market, where the overall benefits received by society are maximized. This view is based on one of the Ten Principles economic theory: usually the market - good way organizations economic activity. Should we conclude that exactly "the invisible hand of the market" prevents paper firms from emitting too much dioxide?

Markets do a variety of things well, but not all of them. Markets sometimes fail to allocate resources efficiently, which is when government can come to the rescue.

Market fiasco falls into the general category of externalities. External effect(externality) - the impact of one person’s activities on the well-being of another. If such an impact is unfavorable, it is called a negative externality, otherwise it is called a positive externality. Given externalities, society's interests in market outcomes extend beyond the well-being of buyers and sellers to include the well-being of other people within the market's influence. Since buyers and sellers, when making decisions about the volume of consumption or supply, neglect external effects, in conditions of externalities market equilibrium is not effective. That is, market equilibrium does not allow maximizing the common benefits of society as a whole. The release of dioxide into the environment, for example, is a negative externality. Paper companies, driven by selfish considerations, do not consider the full cost of environmental pollution; they strive to maximize emissions until the government intervenes.

Externalities, as well as government policies counteracting them, are accepted various shapes. Here are some examples:

• Car engine exhaust has a negative external effect, as millions of people have to breathe poisonous air. The government is trying to solve the pollution problem by setting car emission standards and imposing additional taxes on gasoline consumption, which leads to fewer motorists.
• Restoration of historical buildings is an example of a positive external effect, because people walking or driving past them enjoy the beauty. But the owners of such buildings do not receive the full benefit from their restoration and, therefore, are interested in demolishing them. Many local administrations are trying to resolve the problem by establishing special rules for the demolition of historical buildings and granting deferments tax payments owners involved in restoration.
• Barking dogs create negative externalities because the noise disturbs neighbors. Dog owners do not bear the full cost of noise and therefore do not special effort to stop dog barking. Local administrations solve the problem by introducing rules prohibiting "disturbing the peace of fellow citizens».
• The development of new technologies leads to positive external effects, since their result is new knowledge that is widely used by society. Because inventors are unable to take full advantage of new solutions, they devote limited resources to research. The government solves the problem in part through a patent system, which gives scientists the exclusive right to use discoveries for a certain period of time.

In each of these cases, decision makers fail to take into account the externalities of their actions. In these cases "into battle" the government steps in, seeking to protect the interests of other citizens.

External effects (externalities)- a situation where the costs or benefits of market transactions are not fully reflected in prices. With negative (positive) externalities, the activities of one person cause costs (benefits) for others. If a cement plant emits air emissions, there is a negative externality for nearby residents (they suffer costs not included in the price of the cement and receive nothing in return). If the plant builds a road and surrounding residents can use it free of charge, there is a positive external effect.

If we divide the marginal social benefits() and marginal private benefits (), as well as marginal social costs () and marginal private costs (). then the cause of external effects is the discrepancy between social and private values. If, for example, the costs of a contract between two parties are borne by a third party, a negative externality arises. Externalities are the costs or benefits to third parties (not involved in production) from an activity.

Let us denote marginal external benefits () and marginal external costs () (Fig. 1.25).

Rice. 1.25. External effects: a - negative; b - positive

If a cement plant emits emissions into the atmosphere, their volume depends on the volume of production (Fig. 1.25, a). The proposal without the cement plant taking into account the negative impact on surrounding residents is shown by the line. Whereas if he were forced to pay all social costs, then the supply would be at a lower level. Since Q 2 > Q 1 there is an overproduction of goods, the production of which is associated with negative external effects. If the producer is forced to pay for the external effect (to move from equilibrium point A to equilibrium point B), then prices increase and production volumes decrease.

Let us determine the amount of damage from negative external effects. If the marginal external cost of production
of cement are , and the volume of cement production is Q 2 , then the damage from pollution is determined by the area . However, part of the damage is compensated by the fact that the welfare of the consumer and producer increases as a result of increased cement production. When moving from point B to point A (when pollution appears), the increase in the consumer's gain will be , the increase in the producer's gain will be (since the triangles and!!OP_!A?? are equal). As a result, triangle ABC shows the decrease in efficiency in the economy from negative externalities.

If a plant builds a road (Fig. 1.25, b), it equates its private benefits to marginal social costs, and the volume of production is set at level , (at point A). However, if the benefits from positive externalities were received by the producer, output would be (point B). Since there is an underproduction of goods, the production of which is associated with positive external effects. The plant's demand for roads (),) will be less than society's demand for roads (), and society's demand is not satisfied because society does not motivate the plant to increase production.

Let us determine the amount of damage from positive external effects. If the marginal external benefits are , and the number of roads is , then the total external benefits will be the area . However, underproduction of roads is associated with losses for consumers and producers. The decrease in consumer surplus when moving from point B to point A will be (since the triangles and are equal), the decrease in producer surplus - . The ABC triangle shows a decrease in efficiency in the economy as a result of underproduction of goods with positive externalities.

To reduce the overproduction of goods with negative externalities and reduce the underproduction of goods with positive externalities, it is necessary to bring marginal private costs (benefits) closer to marginal social costs (benefits). A. Pigou saw the solution to this problem in the introduction of corrective taxes and corrective subsidies.

Corrective tax— a tax on the output of economic goods, which brings (by increasing) marginal private costs closer to the level of marginal social costs and reduces the size of negative external effects. When the amount of the corrective tax is reached, negative external effects are transformed into internal ones (internalized).

Corrective subsidy- a subsidy to producers of economic goods, which brings marginal private benefits closer (by increasing) to marginal social benefits and reduces the size of positive external effects. When the size of the adjustment subsidy is reached, positive external effects are transformed into internal ones.

In both cases, the producer of economic goods will take into account positive or negative externalities, and the volume of output of public goods will approach the optimal one. But is any tax on activities associated with costs for third parties compensatory in nature? Consumption of wine and vodka products and tobacco products, no doubt, has an impact on third parties. Can excise taxes on wine, vodka and tobacco products be considered as a compensating tax, provided that demand is inelastic and price increases do not lead to a significant decrease in consumption? For this to be the case, funds from excise taxes must be used to eliminate and compensate for external effects (including the treatment of alcohol and nicotine addiction, propaganda healthy image life or, for example, compensation for non-smokers). Otherwise, the state simply acquires a solid source of income and is not interested in solving problems associated with the use of alcohol and tobacco products.

If for some reason it is impossible or impractical to force individuals to pay for the resulting positive external effect from consuming a good, then this good turns into a public good. Purely public good- a good that is consumed collectively by all people, regardless of whether they pay for this consumption.

A purely public good has two properties at once that underlie the impossibility or inexpediency of compulsory payment: indiscriminate consumption and non-excludability in consumption. Indiscriminateness means that the consumption of a good by one person does not (significantly) reduce the possibility of consumption of this good by other people. An example would be a traffic police officer responsible for traffic safety. No matter how many cars pass by, they equally use his service. Non-excludability means that it is impossible (unprofitable) to prevent people from consuming a good if they refuse to pay. An example would be police services. Even if a person evades paying taxes, he has the right to protection from law enforcement agencies. An example of a purely public good would be defense, which has two properties at once.

If consumers who benefit from the consumption of public goods know that they may not pay for this good (and accordingly do not pay), there is free rider problem. As a result, the production of such goods is unprofitable for private firms, but necessary for society. Moreover, free access to such benefits is effective. After all, an increase in consumption of a public good does not cause an increase in costs, and the overall utility from consumption increases. The free-rider problem is in most cases solved by the state through financing production or subsidizing the consumption of public goods using funds received from taxation.

Externalities and the production of public goods

Interaction generates externalities in relation to the market effects (externalities). They have significant consequences for the well-being of people, the functioning of the market, the optimal allocation of resources, and the efficiency of market equilibrium.

External effects- these are side effects of functioning not taken into account in the price that affect third parties (or society as a whole) who are outside the market transaction. They arise in cases where the price set by the market for a given good does not reflect either its real or its true benefits from the point of view of society. In this case, the third party either bears costs or receives benefits.

The reasons why externalities are not reflected in market prices vary. A producer making a production decision has no incentive to take into account externalities, since doing so could raise price and reduce output and hence profits. In turn, an increase in prices due to the inclusion in them side effects does not meet the interests of consumers, as it reduces the amount of demand.

Without being reflected in the market prices of goods, external effects are presented as the difference between the costs (benefits) of carrying out the market transaction itself and the total costs (benefits), which also take into account the consequences external influences. Therefore, a distinction is made between private, external and social costs and benefits.

Private costs(RS) are the costs of market transaction participants associated with the direct production of the good. Goods included in the market price are internal in nature.

External costs(EU) are the costs of persons caused by the production and consumption of a given good who do not participate in a given market transaction. Not reflected in the price of the good, they have an external character in relation to it.

Social costs(SC) represent the total costs of participants in a market transaction and third parties: SC = PC + EC (Fig. 14.1).

Changes in each type of cost in the form of their increase caused by an increase in the production of the good (A Q) represent marginal private cost(MRS= APC/ AQ), marginal external cost(MEC = AEC/AQ) and marginal social cost(MSC = SC/AQ). These marginal costs are determined as derivatives of the corresponding cost functions (Fig. 14.2).

Marginal social costs are also equal to the sum of marginal private costs and marginal external costs, i.e. MSC = MPC+ MEC.

Private benefit(РВ) is an increase in the welfare of the consumer of a given good.

External benefit (EB)- this is an increase in the welfare of third parties caused by the production and consumption of this good.

Public benefit(SB) represents the total benefit of all persons affected by the production and consumption of a given good: SB = PB + EB (Fig. 14.3).

Caused by an increase in the production and consumption of a good, the increase in each type of benefit is reflected in the categories marginal private benefit(MRV= ARV / AQ), marginal external benefit(MEB = = AEB/ AQ) and marginal social benefit(MSB = ASB/AQ). These marginal benefits are shown graphically in Fig. 14.4.

Forms of manifestation of external effects

External influences can lead to both negative and positive consequences. Depending on the nature of the consequences of the impact, external effects are divided into negative and positive. Negative effects are associated with costs, while positive effects are associated with benefits for third parties.

Negative externality arises when the activities of one economic agent (enterprise) cause costs to others. Negative externalities lead to third parties incurring uncompensated costs (damage). The market does not capture negative externalities, resulting in more output being created than society needs. For example, the discharge of untreated water into a river is proportional to the volume of production. It turns out that as production increases, so does the amount of environmental pollution. Since the enterprise does not purify water, its marginal private costs are lower than marginal social costs, since they do not include the costs of creating additional system treatment facilities. This leads to the fact that the volume of output exceeds the optimal volume of output (Fig. 14.5).

So, without treatment facilities, the quantity of output is Q 1 at a price P 1 . Market equilibrium is established at point E 1, at which the supply curve equal to the marginal private costs MPC intersects the demand curve equal to the marginal social benefits MSB, i.e. MRS = MSB.

But marginal social cost equals the sum of marginal private cost and marginal external cost. Therefore, if it were possible to turn external costs into internal ones, the effective volume

output would be reduced to Q with an increased price P 2. At point E 2 marginal social benefits would equal marginal social costs MSB = MSC.

At point E 2, the consequences of environmental pollution are not completely eliminated, but the damage from pollution is significantly reduced. The area of ​​the triangle AE 1 E 2 shows the loss of efficiency associated with the fact that marginal private costs were lower than marginal social costs. Thus, when the presence of a negative external effect an economic good is bought and sold in a larger volume compared to the efficient volume, i.e. There is an overproduction of goods.

Positive externality occurs when there are positive consequences of the influence of participants in a market transaction on third parties. In this case, the winnings are appropriated not by the owner of the resources that caused the effect, but by third parties, and free of charge. Therefore, with a positive externality, the private marginal benefit of the good is lower than its social marginal benefit.

There are many types of positive externalities. For example, the construction of a swimming pool in a densely populated area has a beneficial effect on the situation of its residents. The beekeeper's activities in breeding bees have a beneficial effect on the pollination of gardens in neighboring areas. People engaged in tourism improve their health, and this saves public funds on health care. A clear example positive externality is the receipt higher education. In a society, each member benefits from what fellow citizens receive good education and bring benefits to society: its educational level increases, prerequisites for development are created scientific and technological progress, more skilled labor is used in production, the crime rate is reduced, the political activity population. However, each person receiving education is unlikely to think about the benefits that society as a whole receives. When making a decision, a rational consumer compares the costs associated with the learning process and the benefits that can be obtained as a result of receiving education. This is why investments in human capital are usually below what is optimal for society (Figure 14.6).

On the graph, market equilibrium E is established at the point of intersection of the marginal private benefit and marginal social cost curves: MPb = MSC.

Meanwhile, marginal social benefits are greater than marginal private benefits by the amount of marginal external benefits. Therefore, for society, an effective equilibrium would be achieved at the point of intersection of the marginal social benefit and cost curves, i.e. at point E 2. Efficiency increases by the area of ​​the triangle AE\E 2. Thus, in the presence of a positive external effect an economic good is bought and sold in a smaller volume compared to the effective volume, i.e. there is underproduction of goods.

Causes of external effects

Formally, the emergence of external effects is associated with differences in the levels of private and public costs and benefits. However, these differences are only a consequence of deeper reasons.

In conditions of limited resources, externalities arise due to competition between different ways of using the resource. The reason for such competition lies in the lack of established property rights to this resource, which allows it to be used for free. If property rights to a resource were established, for example, the population's right to clean air, then they could be sold to a metallurgical enterprise (negative externality). In this case, the valued resource would be used as an internal (imputed) factor of production, which would lead to an increase in the marginal private costs of production to the level of marginal social costs.

A similar situation arises with regard to positive externalities. If the persons whose activities bring additional benefit had property rights to this benefit, they would demand payment for the utility provided, which would mean equalizing marginal private and marginal social benefits. Thus, The cause of externalities is the lack of established property rights to resources. In other words, externalities are caused by “missing markets”, i.e. are of a non-market nature. So, there are no markets for clean air, sunlight, so manufacturers do not have to pay anything for their use. In some cases, difficulties arise in identifying the economic entities responsible for the negative externality. Who, for example, can be considered responsible for acid rain?

The essence of the problem of externalities is the inefficient allocation of resources. It manifests itself in overproduction or underproduction of goods and leads to losses of social utility.

The problem of efficiency is a question of alternative ways resource use. In the case of externalities, it arises due to the fact that, due to the lack of established property rights, the opportunity cost of some resources is underestimated, while others are overestimated. Any resource or benefit is used efficiently to the extent that the marginal costs of its use are balanced by the marginal benefits from it. The solution to the problem of externalities is to ensure that marginal social costs are equal to marginal social benefits, i.e. MSC = MSB. In other words, the solution comes down to adjusting private marginal costs and benefits so that they reflect social marginal costs and benefits. And this can be done by transformation of externalities(externalities) into internal effects (internalities).

In relation to negative externalities, internalization would mean an increase in marginal private costs by the amount of marginal external costs, which will lead to an increase in the price of the good and a reduction in its supply to the optimal level.

In relation to positive externalities, internalization would mean an increase in marginal private benefit by the amount of marginal external benefit. Such adjustments will help reallocate resources towards more efficient use, thereby eliminating inefficiencies.

If property rights to resources are established and they can be freely exchanged, then producers and recipients of externalities could agree on a distribution of these rights in which their costs and benefits would be equal. However, establishing property rights and negotiating their exchange are associated with transaction costs, which makes it difficult and sometimes impossible to solve this problem. But in the case when the costs of establishing property rights and exchanging them are absent or insignificant, then the established property rights will be redistributed in such a way that the resources that have received a monetary value will be transferred to those economic entities that benefit most from it. And since the exchange of rights will be carried out on the basis of taking into account the costs and benefits of the parties, the transformation of external effects into internal ones will be ensured, which will lead to the optimal allocation of resources. For example, if a market for air ownership rights is created, then the owner industrial enterprise(the producer of the externality) or the farmer (the recipient of the externality) will be able to buy this right from each other (to clean air or to pollute it), depending on which of the two can derive more benefit from having this right. The one for whom it is of less value will sell this right to another.

The principle discussed above is known as the Coase-Stigler theorem. It argues that with clearly defined property rights and almost zero transaction costs, no matter how property rights are distributed among economic entities, private and social costs will be equal. In other words, the market mechanism is capable of ensuring the efficient distribution of resources in conditions of clearly established property rights, free exchange of them and the absence of transaction costs. In practice, the conditions for the internalization of externalities through market mechanism turn out to be impossible. The reasons for this include: difficulties in establishing property rights; difficulty in identifying sources of external effects; many producers and recipients of externalities; insufficient information about the costs and benefits of the parties; significant costs of establishing property rights and negotiating. Consequently, using the market mechanism to solve the problem of externalities is not always effective and possible. Therefore, there is a need to use government methods regulation of external effects.

State regulation of externalities

The state regulates both negative and positive external effects.

The consequence of a negative external effect is the overproduction of the good. In this regard, the task regulation of negative externalities is to adjust the volume of supply of a good towards the optimal one.

Various methods are used to solve this problem.

Emission standards— these are the legal limits for the concentration of harmful substances in industrial waste. The practice of setting standards is accepted in almost all countries. However, it has its obvious disadvantages.

Standards are allowed to discharge harmful substances free of charge within certain limits. When establishing uniform standards for the country, it is not taken into account varying degrees witticisms environmental problems in different regions, and there are differences in the marginal private costs of individual enterprises. Therefore, the costs associated with achieving a uniform level of pollution can lead to significant losses for individual enterprises and society as a whole.

Another method of correcting a negative externality is taxes as payments for damage caused. They charge businesses for each unit of pollution they emit and raise marginal private costs to match marginal social costs.

Unlike standards, emissions fees are more flexible. It does not require the collection of hard-to-find information on the marginal costs of reducing emissions and helps reduce the overall volume of harmful emissions. In addition, businesses can benefit from the difference between abatement costs and taxes. Consequently, taxes act as a powerful incentive for enterprises to reduce emissions through improved technology and contribute to the growth of government revenues.

The effect of a positive external effect is expressed in a lower volume of production and consumption of a good compared to the effective one. In this regard, the task of regulating positive external effects is to adjust the volume of consumption of the good towards the optimal one. Since a positive external effect usually manifests itself in the process of consumption of a good, the essence of regulation this effect comes down to exerting a downward effect on the price of a good. This will increase the demand for the good, and therefore production (supply).

The most common method of regulating positive externalities is subsidies, which are payments to consumers or producers of economic goods. Subsidies can be aimed at stimulating demand when their recipients are consumers of a good that causes a positive externality. The forms of such subsidies can be different: food stamps; cash payments poor segments of the population; providing scholarships for education; free vaccination and medical examination.

Subsidies can also be aimed at stimulating supply. In this case, the direct recipients of subsidies are producers, and their impact is expressed in a reduction in the marginal private costs of producing economic goods. An example of this type of regulation is subsidizing agricultural production and housing construction.

Negative external effects (negative externalities) are the negative impact of economic entities participating in a transaction on third parties; it is the cost of using a resource that is not reflected in the price of the product.

An impact may be negative if it results in a reduction in the utility of some consumer or the output of some firm. In this case, they talk about a negative external effect, and a decrease in utility or output is considered an external cost of this type of activity.

The most obvious example of negative effects is environmental pollution. If a chemical plant discharges its waste into a river, it leads to an increase in human illness due to deterioration in water quality. If consumers want to purify water, this requires expense. In both cases, there is an increase in the monetary costs of consumers and (or) a decrease in their level of utility.

1 Negative externality

Marginal individual cost ( MRS) is the cost of services of those resources that firms buy or own. The marginal individual cost of production does not include the marginal external cost if there are negative externalities (market supply schedule).

Marginal external costs ( MES) are additional costs associated with the production of each additional unit of product, which are not paid by manufacturers, but are passed on to third parties.

Marginal social cost (MSC) is the sum of marginal external cost and marginal individual cost (the schedule of possible supply taking into account the negative effect).

When there is a negative externality, the marginal individual cost is less than the marginal social cost.

Total external costs (TEC) are the total damages caused to third parties. They vary depending on the volume of output in the industry ( TEC = MSC *Q) As production increases, total external costs increase.

Figure 1 illustrates a negative externality; It can be seen that efficient output and price are achieved at the point at which marginal social cost equals marginal social utility (Ps,Qs). In conditions of free competition and in the presence of a negative external effect, prices are understated in comparison with the efficient one and the production volume is overstated in comparison with the efficient one (Qp>Qs;Pp

Positive externalities

Positive externalities are the beneficial effects of economic entities participating in a transaction on third parties; it is the utility not reflected in prices.

The impact can be positive if it results in an increase in the utility of the third-party consumer or the firm's output. In this case, they talk about a positive external effect, and the increase in utility or output is considered the external benefits of this type of activity. For example, a farmer installs an irrigation canal on his plot of land, as a result of which the quality of neighboring plots of land improves without the investment of capital from their owners.

2 Positive externality

Marginal individual utility (MIU) of a good is the marginal utility received by a person who purchased an additional unit of a good (demand schedule on the market).

G is the additional utility obtained from the consumption of each additional unit of production by third parties, which is not taken into account by the parties to the transaction and is not compensated to the manufacturer of the product.

Marginal external utility (MSB) of a product is the marginal gain extracted by third parties who are neither sellers nor buyers of this product (a possible schedule of demand for a product taking into account the external positive effect).

When there is a positive externality, marginal social utility exceeds marginal individual utility.

Total external utility (TEV) is equal to the product's utility per unit multiplied by the number of units consumed. (TEB = MSB *Q)

Due to the fact that third parties deriving external benefits do not take part in concluding and completing transactions with this product, their benefits are not taken into account when concluding such transactions, and the equilibrium prices and quantities established in the market differ from those values ​​that would be obtained through free competition. Hence, the result of positive external effects is insufficient output and undervaluation of the price of this product, which leads to a decrease in the efficiency of the economy. (Qp

Negative externalities. An impact may be negative if it results in a reduction in the utility of some consumer or the output of some firm. In this case, they talk about a negative external effect, and a decrease in utility or output is considered an external cost of this type of activity.

Let's assume that aluminum smelters pollute the environment: for every unit of aluminum produced, a certain amount of harmful waste is released into the atmosphere. Because toxic emissions make people who breathe polluted air more likely to get sick, we have a negative externality.

Rice. 1

The demand curve reflects the value of a good to buyers, and the supply curve reflects the costs of sellers. The equilibrium quantity of a good, Qmarket, corresponds to the point at which the total value to buyers minus the total costs to sellers reaches its maximum value. Therefore, if we abstract from the external environment, market equilibrium is efficient.

Rice. 2

Under conditions of negative externalities, the social costs of aluminum production exceed private costs. The optimal amount of aluminum, Qoptimum, is therefore less than the equilibrium amount, Omarket.

The presence of an externality means that the cost of aluminum production for society exceeds the cost of aluminum production for the producer. The social cost of each unit of aluminum produced includes the private costs of aluminum producers plus the costs of people adversely affected by environmental pollution. Figure 2 shows the social costs of aluminum production. The social cost curve is above the supply curve because it takes into account the external costs passed on to society by aluminum producers. The difference between the two curves reflects the costs of pollution

Positive externalities. The social costs of production exceed private costs in many markets, but there are also markets in which externalities benefit other people. That is, in this case, the social costs of production are less than the private costs. One example is the market for industrial robots.

Robots are at the forefront of rapidly evolving technology. Whenever a company creates a robot model, there is a possibility that it will soon develop a new, more efficient model that will benefit not only its creators, but also society as a whole, as it will become part of technological knowledge. This type of positive externality is called technological spillover.

The analysis of positive externalities is similar to the analysis of negative externalities. In Fig. 3 presents the robot market. Due to technological spillovers, the social costs of producing robots are less than the private costs. Consequently, the social planner will decide to produce more robots than the private market.

Rice. 3

In conditions of positive externalities, the social costs of production are less than the private costs. The optimal number of robots, Qoptimum, is therefore greater than the equilibrium number, Qmarket.

In this case, the government can internalize the externality by subsidizing the production of robots. If the government paid firms for each robot produced, the supply curve would shift downward by the amount of the subsidy, causing the equilibrium quantity of robots to increase. To ensure that the market equilibrium equals the social optimum, the subsidy must be equal to the value of the technological spillover.

The impact can be positive if it results in an increase in the utility of the third-party consumer or the firm's output. In this case, they talk about a positive external effect, and the increase in utility or output is considered the external benefits of this type of activity.

Based on the direction of action, external effects can be divided into the following four groups.

1) "Production - production." Negative externality: a chemical plant releases its waste into the river, which interferes with the production of a brewery located downstream. Positive external effect: the beekeeper's apiary and the fruit producer's apple orchard located nearby have a beneficial effect on each other (honey collection depends on the number of apple trees, and vice versa).

2) "Production - consumption". Negative impact: residents of surrounding areas suffer from harmful emissions into the atmosphere from industrial enterprises. Positive impact: a plant in a small village is repairing a road along which local residents also travel.

3) "Consumption - production". Negative effect: family picnics cause forest fires that damage forestry. Positive effect: the fence of the enterprise does not need to be guarded if there is a crowded street nearby and not a single thief can climb over unnoticed.

4) "Consumption - consumption." Negative effect: An individual's utility decreases if his neighbor plays music at full volume at night. Positive effect: if you set up a flower garden in front of your house, then the benefit of your neighbors from contemplating beautiful flowers will increase.

Thus, some economic entities (firms or consumers), while pursuing their goals, can simultaneously cause damage or benefit other entities.