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Author: Andreea-Geanina Nunveiler

Externalities

The market failure is a complex phenomenon explained by the economists as being a result of inefficiency and imperfection of competition, or, in another explained in his ords, a failure in obtaining the status of !areto optimal" The American economist, #oseph Eugene $tiglit% orks that market failure arises from six basic reasons: imperfect competition, public goods, externalities, incomplete markets, imperfect information and unemployment" &e also agreed that the government's intervention is absolutely necessary, taking into consideration the fact that individuals sometimes act against their o n best interest, consume goods that harm their health or other people's health, pollute the air and contaminate the ater" &o ever, the libertarianism concept reminds economists and politicians to accept the reality in decide hich e live" (ndividuals have the right to choose hat is better for them) they hen a motor cyclist refuses to hether to obey the la or to break it and to take rules only as foolish principles

thinking that #ustice is still blind and po erless" *or example,

ear helmet he puts his life in danger and the probability of being seriously in+ured increases" These kinds of situations imply a chain-reaction phenomenon) health services are involved and additional costs are to be taken into consideration" (n order to avoid negative behaviors, the government introduced specific regulations, taxes and fees that are trying to prevent a financial chaos in our societies" (n order to refer to the main sub+ect of this essay, a definition ould be necessary for better understanding the concept of externalities" #" E" $tiglit% considered that externalities exists , henever an individual or firm undertakes an action that has an effect on other individual or firm, for hich the latter does not pay or is not paid- . and agreed that externalities lead to market failure and inefficient resource allocations because controlling externalities re/uires additional costs, called also external costs" The society is affected by externalities because the private sector has a different perspective upon valuing costs and benefits and only the government has the po er to bring the society into e/uilibrium" Externalities can be either positive or negative, depending on individuals or firms ays of acting" 0r" !aul 1" #ohnson described the positive externality as ,positive economics- or ,positive benefit- and defined its conse/uences by commenting that positive
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#" E" $tiglit%, Economics of the Public Sector, 2"2" Norton 3 4ompany, 5666, p" 5.7

externality ,results

hen part of the benefit of producing or consuming a good or service hich produces or purchases it- 5 *or example,

accrues to a firm or household other than that

a rich person en+oys houses built in the gothic architectural style" Therefore, he buys a site in the centre of 4lu+-Napoca and he has his house constructed in gothic style" &is decision reflects a positive externality because people admiring the building ho alk near his house may also en+oy ithout being restricted, punished or forced to pay any tax" 1oreover,

this type of acting offers a positive image for the city, encourages tourism and might be an advantage for tourism firms that are in search for sites that attract potential tourists" Economists agree that a positive externality is obtained hen the marginal social benefit exceeds the marginal private benefit" Not only individuals are sources of positive externalities" (n fact, firms are the main source of positive economic activities and play a ma+or role in social and economical development" (f the local authorities from a city decide that an international firm increases the financial po er of the city, they that firm and they ill negotiate ith ill do their best to convince it to invest in that area" The 899 million ork, the unemployment rate as reduced and the local budget

investment made by Nokia in #ucu, 4lu+ district, in 566: is a positive externality because people found places to increased, the standard of living as improved" Nokia's managers have also taken into

consideration to train students and to offer them seasonal +obs" Trainings reduce the costs that other firms should proceed and increase the labour productivity" Although in our days positive externalities are seen as a ,blessing-, there hen the government refused to sustain activities Festival held annually in ;rasov, festival ere times hich bring benefits" The Golden Stag

as first organi%ed under the communist regime" After fe

editions, the dictator Nicolae 4eausescu came to the conclusion that the international music ould bring to <omanians a dangerous taste of freedom and decided to end it" No adays, the festival is sponsored by the public <omanian channel television, TVR, by the municipality from ;rasov, the <omanian 1inistry of 4ulture and by other less little sponsors" (n 5669, the Administrative 4ouncil of our public television took about 8., 7 millions from the government to organi%e the event=" $ustaining arts is another example of positive externality" >nfortunately, externalities lead to market failure because there are cases in services or products are good for people, a truth
5

hich

government has to intervene and has to use its paternal authority ? paternalism). Not all hich surely explains negative externalities"

0r" !aul 1" #ohnson, A Glossary of Political Economy Terms, http:@@ "auburn"edu@A+ohnspm@gloss@externality = http:@@economie"iis"ro@5669@69@56@page@B@

4igarettes and smoking are usually associated cancer, mental problems) prostitution

ith diseases: lung cancer, heart diseases etc)

alcohol abuses are associated ith medical problems such as: diseases of the digestive system, ith A(0$ and other sexually transmitted diseases" Even if economists remind about the public choice, government treats some commodities against consumer's choice" The government is fighting against smoking and abuses in alcohol consumption through anti-smoking and anti-alcoholic campaigns ?together externalities ith nongovernmental organi%ationsC, by introducing excises in order to correct the negative hich occur in economic activites" Adam $mith said about excises, the so called ,sumptuary taxes- or !igovian taxes, that: ,The motive for the implementation of excise should be nothing more than to curb the pursuit of goods and services harmful to our health and morals"-B (n <omania, excises are levied for mineral oil products, tabaccos, alcohol, coffee, electricity" The <omanian ne s agency 1ediafax informed in december 5669 that <omanian had set the minimum cigarette excise at .DD,:E <FN@.666 cigarettes available in the period the . st of #anuary G the =6th of #une 566E , EH higher than the excised enforced in the second half of 56697" Although the government is trying to do its best to make people understand the risks of smoking, recent studies have sho n that over 7 millions of cigarette packets are smoked every day in <omania" The problem A hich leads to a negative externality is that smokers harm themselves, but they also harm the ones ho breath their smoke" ell kno n type of negative externalities are the environmental ones" Economist use the term of environmental externality to Irefer to the economic concept of uncompensated environmental effects of production and consumption that affect consumer utility and enterprise cost outside the market mechanism- D" This definition explains hy the private cost of production is lo er than its social cost" External costs, that the economic activities are facing, provoke inneficiency, dise/uilibrium, market failure" !ollution, exploitation of energy sources, chemical intrusions into the natural global orld, arming, climat change, acid rain, endangered species are international problems

hich imply the government's intervention" ;ut the government has not the sufficient po er to fight alone against externalities" (n fact, private markets play a ma+or role in this battle and the economic thinking still remains an important source of inspiration for the government's activity" #oseph $tiglit% brought the solution of internali%ing the externalities Iby forming
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http:@@en" ikipedia"org@ iki@Excise http:@@ "mediafax"ro D Glossary of Environment Statistics, Studies in Methods, $eries *, No" D:, >nited Nations, Ne Jork, .EE:, http:@@stats"oecd"org@glossary@detail"aspK(0L95B

economic units of sufficient si%e that the most conse/uences of any action occur unit-:" (n our country, it is cooperatives because these types of associations offer services

ithin the

ell kno n that many <omanian farmers +oin agricultural hich help them to set up

farms, to receive financing, to obtain authorisations and financial support" The idea of being part of a cooperative implies certain standards that farmers should respect" *or example, a legal agreement stipulated in a contract may re/uest certain obligations for farmers: to produce a certain amount of goods and to sell a specific percentage of that amount" (n the market economy, independent firms are also enforced to internali%e externalities" An enterprise hich has sufficient control over a product or service ?monopolyC has a significant profit" (ts profit should be used in order to internali%e the externality, that is to pay the cost of pollution in order to repair any damage" ;ut not all enterprises have sufficient money to pay pollution taxes and the government had to find rapid solutions: introduced taxes, used the legal system to punish the ones ho pollute the ater, the air or the land" The government has to act as having property rights over natural resources or as a trustee" ;y using the legislation people are enforced to obbey a set of rules" This is a solution provided in cases in million litres of oil hich people, firms, factories do not value our natural resources hen about B6 ere spilled into the sea, the court used the term of existance value to as ?existance valuesC" (n the Exxon Malde% oil spill, an accident from .E9E

assess the damages" (n <omania, one of the natural habitats threatened by pollution and overfishing is the 0anube 0elta" >nfortunately, under the communist regime, a part of it transformed into agricultural fields and fishermen ."666 tonnes of garbage are ere forced to become farmers" Annually,

asted by locals and tourists in the 0elta" This problem ay they act expresses a lo

endangers not only the species but also the tourism in the area" 2hen speaking about people ho pollute the environment, it is necessary to remind that the level of education and morality" 1any of us kno beer containers are refundable but e rarely return them" The 4oase theorem represents an important source for analysing externalities and a private solution for externalities" The Nobel !ri%e in Economics stations used the same fre/uencies inner, <onald 4oase ith each other's developed the theorem hile explainig the regulation of radio fre/uencies G the fact that radio as a problem because they interfered broadcast" &e considered that those interferences ere not a problem taking into account that that glass bottles, such as 4oca-4ola or

the radio station hich ould be the leader ould have to pay transaction costs ?incentivesC to
:

#oseph $tiglit%, Economics of the Public Sector, 2"2" Norton 3 4ompany, 5666, p" 5.9

other stations not to interfere" 4oase introduced the property rights concept to motivate his thinking" (t does not matter hich radio station has the initial property rights but hich station values more its right to broadcast" No adays, 4oase theorem is applied hen t o or more individuals or firms have to make a deal or to pay each other for their action so that externalities are internali%ed and market efficiency is obtained" &o ever, this sometimes sounds too idealistic) a smoker does not pay his nonsmoker friend restaurant" The public sector gives solutions to externalities through market-based solutions and direct regulation" ;ecause many firms use environment as a factor of production and the environment offers its products for %ero price, the market-based solutions for environmental problems establishes prices for the use of environment" The price is established according to the amount of pollution that the firm emits: IThe problem ith the market is not that it results in pollution) there is, indeed, a socially efficient level of pollution" The problem rather is that firms fail to take into account the social costs associated ith the externalities they impose G in this case, pollution G and as a result, the level of pollution is likely to be excessively high"-9" 1arket-based solutions consists in introducing fines and taxes, such as discharge fee G the polluter has to pay a certain price per each tonne of pollutant" !ollution taxes or !igouvian taxes are raising revenue, affect the production and reduce pollution and are more efficient" The correct the negative externalities in market activities" 2ith the direct regulation, instead, a polluting company has no incentive to pollute any less than pollution abatement expenditures" hat is permited" The government can, also use other remedies in case of pollution abatement) it can subsidi%e ho decides to sit at his table in the room for smokers in a

#" E" $tiglit%, Economics of the Public Sector, 2"2" Norton 3 4ompany, 5666, p" 55B

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