Externalities

When one speaks in the national economy of so-called externalities, one basically means economically oriented decisions of companies that unintentionally hit uninvolved market participants.

The person causing the damage, ie the company here, does not compensate. The injured and uninvolved market participants are therefore not awarded any compensation for the inconvenience caused.

As a result, the cessation of the companies that accept such externalities is quite egotistical and only aimed at the highest possible profit. Social and ecological goals remain completely ignored. But what kinds of externalities are there in the economy and what could be practical examples?

Types and Examples of Externalities

In principle, an externality can be positive or negative. Not every externality has to be bad at the same time. A negative external effect is the so-called external cost. In rare cases, however, externalities can also be positive. Then one speaks of an external benefit .

There are countless examples of externalities that are often associated with the environment and with health.

For example, a coal-fired power station produces energy and as a waste product, pollutants are released during production, which are simply released into the environment. The inhabitants of the coal-fired power station could be harmed in health and need treatment. The costs that must be spent on the health recovery of the residents are the external costs. Under normal circumstances the coal-fired power station does not pay these costs, which is why it is an external effect, or more precisely an external cost.

Another example: a motorway is expanded by two additional bumpers and residents are bothered with additional noise by passing cars. If an appropriate noise barrier is built, it is an external effect. The highway is used by countless car and truck drivers. None of them paid for the noise protection.

Development of Externalities

If a company has to keep an eye on the costs of its production, ecological and social objectives are completely ignored. The social costs are, for example, passed on to society through the egoistic approach of the victims. A (financial) compensation does not take place. Since a large part of the companies almost always have the highest possible profit in mind, it often happens that externalities hit the company and thereby damage.

Amount of External Costs

The real difficulty is the exact amount of the external costs. In general, it is very difficult to define the amount of external costs. First of all, it is extremely difficult to find out which costs are an external effect and which costs would arise in any case. As a result, it is usually very difficult for the state to determine the cause for the externalities.

Externalities mean Market Failures

If there is externalities in an economy, you can basically say that the price mechanism has failed . As a result, a market failure occurs and the state is more or less compelled to intervene in the event. Especially in a social market economy, it is ultimately impossible for a company to simply harm other market participants, such as the company or other companies, without a corresponding compensation. In principle, here too, of course, the polluter pays principle applies: The person responsible for the externalities must be held accountable and justified for his actions.

Briefly Summarized:

• Externalities affect uninvolved market participants


• Externalities are basically a form of market failure as the price mechanism has failed


• Externalities can only be very difficult to assign to the polluter


• The amount of externalities can usually only be estimated


• There are positive and negative externalities
  


• Causes of externalities are mostly companies with particularly pronounced profit orientation