In Economics, What Is Externality?

Economic externality, also called economic activity externality, is an important concept of economics. In social and economic activities, the behavior of one economic subject (country, enterprise, or individual) directly affects another corresponding economic subject without giving it Externalities arise when payments are made or compensated accordingly. Economic externalities are also called external costs, external effects, or spillover effects. Externalities can be positive or negative.

Economic externalities

Economic externalities are

The existence of economic externalities will affect other

According to the different structures of the market, economists divide the market into four types:

Clarification of property rights

Many economists have made important contributions to the development of externality theory, but landmark economists are rare. When it comes to externality theory, the names of the three economists must be mentioned, and the height of the landmarks can be mentioned. They are Marshall, Pigou and Kos.

Marshall is the founder of the British "Cambridge School" and a representative of the neoclassical economics school. Marshall did not directly and explicitly propose the concept of externality, but this concept originated from the concept of "external economy" proposed in Marshall's "Principles of Economics" published in 1890.

In Marshall's opinion, in addition to the three production factors of land, labor, and capital that have been proposed many times in the past, there is another factor, which is the "industrial organization." The content of industrial organizations is quite rich, including division of labor, improvement of machinery, relative concentration of related industries, large-scale production, and enterprise management. Marshall used the concepts of "internal economy" and "external economy" to explain how changes in the fourth factor of production can lead to increased output.

Marshall pointed out: "We can divide the economy that results from the expansion of the production scale of any kind of goods into two categories: the first is the generally developed economy that depends on this industry; the second is that it depends on individual enterprises engaged in this industry Resources, organization, and efficiency of the economy. We can call the former the external economy and the latter the internal economy. In this chapter, we mainly study the internal economy; but now we want to continue to study the very important external economy, this economy It can often be obtained because many small businesses of similar nature are concentrated in a specific place-commonly known as the distribution of industrial areas. "He also pointed out:" The general conclusions of this article indicate the following two points: first, any goods The increase in the total output of a company generally increases the size of such a representative enterprise, and therefore increases all its internal economy. Second, the increase in total production often increases the external economy that it obtains, thus making it Can spend less labor and costs than before to make goods. "" In other words, we can say in a nutshell: Nature is producing The role played shows a tendency of diminishing returns, while the role played by humans shows a tendency of increasing returns. The law of diminishing returns can be explained as follows: the increase of labor and capital generally leads to the improvement of the organization, and the improvement of the organization increases Efficiency in the use of labor and capital. "

Although Marshall did not put forward the concepts of internal diseconomy and external diseconomy, according to his dissertation on internal and external economy, the concepts of internal diseconomy and external diseconomy and their meanings can be logically derived. The so-called internal diseconomy refers to the increase in production costs due to various factors within the enterprise. The so-called external diseconomy refers to the increase in production costs caused by various factors outside the enterprise. Marshall takes the development of the enterprise as the center of research, and examines various factors that affect the cost of the enterprise from both internal and external aspects. This analysis method provides unlimited imagination for economic successors.

Pigou was Marshall's disciple. He published the book Wealth and Welfare in 1912, which was later revised and enriched. In 1920 he changed his name to Welfare Economics and published it. This book is Pigou's masterpiece, and it is the first monograph on the welfare economics in the history of the development of western economics. Therefore Pigou was called the "father of welfare economics".

Pigou systematically studied the issue of externality from the perspective of welfare economics for the first time using modern economics methods. On the basis of the concept of "external economy" proposed by Marshall, he extended the concept and content of "external diseconomy" to address the issue of externality. The research perspective shifts from the effect of external factors on enterprises to the effect of enterprises or residents on other enterprises or residents. This shift happens to correspond to two definitions of externality.

Pigou explained the externality by analyzing the deviation between the marginal private net output value and the marginal social net output value. He pointed out that the marginal private net output value refers to the output value obtained by an individual enterprise adding one unit of production factor in production, and the marginal social net output value refers to the output value added by adding one unit of production factor to production from the perspective of the whole society. He believes that if the marginal private net output value of each production factor in production is equal to the marginal social net output value, its marginal social net output value is equal for all production uses, and the product price equals the marginal cost, which means that the optimal allocation of resources status. However, Pigou believes that there is the following relationship between the marginal private net output value and the marginal social net output value: If other people get benefits beyond the marginal private net output value, then the marginal social net output value is greater than the marginal private net output value; otherwise, if others suffer losses Then, the marginal social net output value is smaller than the marginal private net output value. Pigou called the "marginal social benefits" of the producer's beneficial effects on society, and the "marginal social costs" of the producers' adverse effects on society.

Under the circumstance that marginal private benefits and marginal social benefits, marginal private costs and marginal social costs are divergent, it is impossible to maximize social welfare by relying on free competition. Therefore, the government should adopt appropriate economic policies to eliminate such divergences. . The economic policy that the government should adopt is to levy taxes on sectors with marginal private costs less than marginal social costs, that is, to tax enterprises when external noneconomic effects exist; implement incentives and subsidies for sectors with marginal private benefits less than marginal social benefits. That is, when there are external economic effects, companies are subsidized. Pigou believes that through such taxes and subsidies, internalization of external effects can be achieved. This policy proposal became known as the "Pigou tax".

Coase was the founder of New Institutional Economics, and he won the 1991 Nobel Prize in Economics for "discovering and clarifying the significance of transaction costs and property rights to the institutional structure and operation of the economy." Coase's award-winning achievement lies in two papers, one of which is "Social Cost", and the theoretical background of "Social Cost" is "Pigou Tax". For a long time, the internalization of external effects has been dominated by Pigou's tax theory. In "Social Costs", Coase repeatedly mentioned the Pigou tax issue. To some extent, Coase's theory was formed in the process of criticizing Pigou's theory. Coase's critique constitutes the so-called Coase's theorem: if the transaction cost is zero, no matter how the rights are defined, the optimal allocation of resources can be achieved through market transactions and voluntary negotiation; if the transaction cost is not zero, institutional arrangements and choices are important of. That is to say, it may be possible to replace Pigou s tax with a form of market transaction, that is, voluntary negotiation, to resolve externalities.