External effects

Also known as: Externality

Unter externen Effekten werden in der Volkswirtshaftslehre ökonomische Entscheidungen von Unternehmen verstanden, welche sich auf unbeteiligte Marktteilnehmer auswirken. Die verursachenden Unternehmen ignorieren dabei die sozialen und ökologischen consequences ihres Handelns. Bei solch einem Mechanismus muss der Staat eingreifen, um andere Unternehmen sowie Haushalte zu unterstützen.

Definition / explanation

The most striking feature of external effects is that they do not affect the causer himself. The reason for this is that there is no relationship or contractual relationship between the polluter and the person concerned. The cause of external effects is the discrepancy between private and social costs or income.

Private costs - Costs that have to be borne by the company and the person involved

Social costs - Costs that arise for the entire economy

Types of external effects

Positive external effects - In the case of positive external effects, third parties benefit, who are also known as free riders, because they use a good but do not have to pay for it.

An example of positive external production are companies that carry out research and publish the results. The company profits from this, but third parties also benefit from the results.

Negative external effects - Negative external effects mostly occur in the transport and energy sectors. In traffic, for example, the situation is as follows: A traffic service includes a certain benefit, such as reaching a destination as well as the costs incurred (e.g. repairing the roadway).

The possible costs are not entirely incurred by the road users. These are blamed on other people or society. Because of this, one can distinguish between negative internal and external effects.

Forms of external effects

Intrapersonal - The intrapersonal external effect is characterized by learning effects in the economy. Due to a lack of information, the use or consumption of a good is assessed differently beforehand than afterwards, since consumption influences preferences.

Psychologically - The psychological external effect is referred to in the economy as interdependencies of the utility function without a physical connection. An example of this is the purchase of a car - here an externality comes about in the form of a positive share - envy of the neighbor.

Positional - The positional external effect describes the position between two participants. If one person increases their positional goods (relative consumption), the other person suffers a relapse. An example of this is the construction of an expensive house in the neighborhood, as a result of which a small neighboring house is being affected.

Pecuniary - The pecuniary external effect describes the impact of decisions made by a specific person on the distribution of income between people, whereby the third parties concerned are covered by the price system but have no say in the matter.

One example of this is the loss of profits for people due to changes in the demand structure of other people. Offers from a low-cost provider that reduce the profit of other companies.

Technological – Ein klassisches Beispiel für einen technologischen externen Effekt ist die Umweltverschmutzung (negativ) aber auch Forschungssubventionen (positiv). Beide Varianten wirken sich auf Nutzenfunktionen von Unternehmen und Haushalte aus und können Market failure verursachen.

External effects embody market failure

External effects cause the price mechanism to fail, which is commonly referred to as a market failure. Thus external effects are a form of Market failure. The state must intervene here and hold the person responsible for the external effects accountable.

In principle, the polluter pays principle applies - in reality, however, it is difficult to determine who is responsible for a negative external effect.

Summary

  • Effects affect uninvolved market participants
  • there are different types (positive / negative) and forms of external effects
  • external effects generally mean market failure
  • they affect the entire economy
  • The cause is the discrepancy between private and social costs
  • The effects and causers cannot be precisely determined
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