Externality

As an external effect (also externality ) is called in economics, the uncompensated impact of economic decisions on uninvolved market participants - in simple terms so effects, for which no one pays or receives compensation. They are not included in the decision calculus of the causer. In economic terms, they constitute a form of market failure and government intervention may make necessary.

Negative externalities are also referred to as external or social costs, positive external benefits or social return. External means here is that the effects (side effects) of a behavior are not (sufficiently) taken into account in the market. The term " external costs " was introduced into the national economy about 100 years ago by Arthur Cecil Pigou ( 1877-1959 ); laid in the 1950s, Karl William Kapp before an extensive collection of empirical material.

• 3.1 Concept of the " costs of inaction "
• 3.2 Hedonistic price concept
• 3.3 Damage Function / dose - response approach
• 3.4 Concept of preferences expressed ( Stated Preferences )

Alternative definition

From the perspective of New Institutional Economics, an economic decision is to be seen with uncompensated effects on third parties initially as interdependence. An external effect exists when the interdependence within the existing regulatory framework is not involved in the decision. Since the creation of a framework is seen as a state responsibility, the externality is to interpret rather than government failure. This definition not only the mutual influence is relevant but also crucial why it comes to this interdependence.

Molding

Intra Personnel

The term intrapersonal externality referred to in the industry learning effects, which mean that a person's consumption of a good because of information deficiencies prior to consumption are judged differently then because of consumption causes a change in preferences.

This refers to "external", " outside of the accounting period ." An example of an intrapersonal externality is a drug addiction, when the risk of dependence was not known before.

Psychologically

The term psychological externality referred to in the economic interdependence of utility functions, without requiring a physical connection exists. This can for example be altruistic or envious nature.

An example is the purchase of a new car: where an externality occurs when neighbors in the form of a positive participation (favor ) or of envy.

Pecuniary

As a pecuniary externality the impact of decisions a person will be referred to the distribution of income between persons who have no control over the third party concerned, however, be covered by the price system. Herein, "external " to the " lack of participation opportunities ."

An example of a pecuniary external effects are profits at a person through the demand structure change in another person. By offering a low cost provider of the profit of other enterprises will be reduced, for example. Another example is the increase in China's demand for steel in the first decade of the 21st century (due to the rapid economic growth ), the short supply in iron and thus more expensive.

In contrast to technological externalities, pecuniary externalities act directly in the supply and demand functions of the market and are therefore internalized independently. The market failure due to externalities (positive or negative ) is thus eliminated without outside intervention by the market itself.

Technological

The theory of technological externalities plays, among others, in economic theoretical consideration of pollution ( environmental economics ) in the form of negative externalities arising there a prominent role (see environmental policy). This occurs market failure. No less significantly, the positive externalities particular mention of basic research, which government research subsidies can be legitimized. Although the interpretation of basic research as a public good, perhaps even better in this case applies.

Technological externalities ( positive or negative) effect in production and utility functions of firms and households and cause market failure. To achieve efficient allocation of resources and production volumes, action must be taken from outside the market to internalize the technological externalities.

External costs are costs that are not paid by the polluter, but by others. Usually comes at least in part on the taxpayers for it. External costs are the negative part of the external effects represents a external benefit is deemed to exist if the polluter ( the external benefits ) does not come into the enjoyment of the full benefit.

Negative external effects

External costs are incurred primarily in the energy and transport sector. In traffic, the situation is as follows: Any transport activity comprises a certain benefit (usually reaching a goal ) and costs. Of these costs and benefits, however, are not covered in full by those at which avail the transport performance ( transport users ). Some of these costs fall on other people or the entire society blamed. One can, therefore, the costs are borne by others between the "internal" or private costs borne by the person engaged in the transport activity (eg, time, vehicle and fuel costs) and the " external costs " (, eg road construction and maintenance, follow-up costs of emissions ) are different. The sum of the two types of costs is referred to as "social costs" ( not to be confused with social costs ). Negative externalities arise when the well- being of an individual is affected by the activities of another individual who does not consider these " side effects " in his decisions.

Positive external effects

The benefiting from an external third party benefits are also known as copycats, as they use an asset without paying for it. Thus, the use of a perfume has (often) pleasant and therefore benefit -enhancing effect on others, but we do not expect any monetary compensation for it. Also comes as the called party of a telephone conversation to enjoy the free communication, a condition which was also designed explicitly so.

A positive external effect leads but " welfare technically " not even to an optimal distribution. Because usually are activities that cause a positive external effect, carried out in to a small extent. A company that performs research and development and the results also published by himself has a profit, but other companies also benefit from the increased knowledge. It can therefore be assumed that too little researched and developed without appropriate funding. The cost of a positive external effect can be offset by subsidies, for example, in the case of research by the definition and protection of intellectual property rights ( eg in the form of patents ).

Another example that is often cited here, is the dike. Suppose the owner of land, which is located close to a risk of flooding waters, builds a dike, the underlying land enjoy namely the protection of the dike, but the cost has to wear only the owner of the dike. The dike is therefore regarded as an example of a public good that must be funded by the State through tax dollars. However, it did dike associations in the past centuries to spread the cost of dikes to the beneficiaries without state intervention.

Measurement and evaluation

To describe external effects and to integrate them into decision-making processes, it is necessary to measure and evaluate these in money. There is no universal method that estimates of external costs can therefore depending on the model or data collection methods used vary widely.

The following models are used for the assessment of external effects:

Concept of the " costs of inaction "

Here, it is investigated how expensive it would be to avoid the external effects by alternative technology or decrease.

Example: The development of a road increases the noise of the local residents. Through the construction of a noise barrier, noise levels could fall back to the previous level. The cost of the noise barrier correspond to the external costs of noise.

• Advantage: The cost is (seemingly) simple and clear to be determined.
• Disadvantage: Often there is no technology with which the effects can be clearly balanced.
• Fatal disadvantage: it needs to be found not just any technology, but the technology with the lowest cost ( "Least Cost Planning "). Otherwise, the costs are overestimated.
• Fatal downside: It is not guaranteed that even the most cost-effective technology is not more expensive than the sum of the willingness to pay for the elimination of the external effect.

Hedonistic price concept

Here, the influence of the measured external effect is considered on market prices of traded goods.

For example, a new road is built. A result, the prices of homes fall directly on the road. The sum of these price changes are the external costs of road. At the same time as housing prices rise at the end of the road because one of there now comes faster in the city. The sum of these price increases are the external benefits of the road.

• Advantages: The change in market prices is easy to measure.
• Cons: changes in market prices are never a single cause.

And a separation caused by other external effects causes is not possible. A completeness of measuring externalities is not possible. In the above example, the effect of CO2 emissions on the global climate is not included.

Damage function / dose - response approach

Here, the size of the effect, first in non- monetary terms (eg particulate matter concentration ) is measured. Because of the known or assumed damage function ( the risk of cancer increases in a defined ratio to the concentration of particulate matter) is now on monetarily measurable variables ( here: number of cancer patients is the cost of cancer treatment) closed.

• Advantages: This method is based on verifiable scientific evidence.
• Cons: The monetary evaluation is only for part of the cost ( here: health care costs ) are possible.

Concept of preferences expressed ( Stated Preferences )

This is carried out a survey of stakeholders for their ( denominated in money) are affected by the external effects. For example, one could, in the case of road construction, the citizens ask beside the road, against the payment of which (minimum ) amount, they would agree to build (minimum compensation requirement ). Alternatively, after the maximum willingness to pay asking that the road is not built.

• Cons: Since (as opposed to buying in the market) flows no money from the survey, there may be an interest of respondent because to exaggerate their own preferences strategically. The residents of the new road is its minimum compensation requirement may indicate extremely high, so that the road is not built. In practice, attempts to minimize strategic behavior by an incentive -compatible design of the survey.

The method can also be used in combination.

Strategies and instruments

The economic problem of externalities is that the perpetrators of externalities do not observe these in their economic calculus. Without government intervention so overall social costs caused in the case of negative externalities, since they are not taken into account by decision-makers or not caused in the case of positive externalities overall benefit, since the decision would not benefit from them. Neither is desirable from a welfare economic point of view and therefore often leads to government intervention. Externalities prevent the Pareto optimality of a market. To prevent externalities are several options available, the best solutions are achieved by internalization, ie the inclusion of externalities in market activity.

External effects can be mitigated by a Maßhalteappell (moral persuasion ), but are a weak measure.

It can also be set up general rules which perform a negotiability of property rights to internalize. This solution relies on the Coase theorem. An example of this is the Emission Trading Scheme. Another solution provides the right to have the tortfeasor liable in accordance with the polluter pays principle.

There are also opportunities to state intervention: For external effects could be mitigated by state provision, or be imposed by the State commandments, prohibitions and obligations. Taxes, subsidies and compensation for public services ( eco-bonus ) are other economic instruments to internalize external costs. Here are steering duties as the Pigouvian tax (social levy ) with their internalizing effect to name as well as the standard - price approach. These have the advantage that, in contrast to prohibitions economic agents leave the choice to reduce the cost where this is possible at the lowest cost. By each good its true, external costs are charged to receive producers, consumers, users or other citizens participating in the market the right price signals. Thus, not only the environment but also the overall economic welfare improves in the ideal case ( win-win ). This is formulated in the double -dividend hypothesis and applied in practice: In Switzerland, for example, the CO2 tax ( price -standard approach) and the related heavy vehicle tax ( Pigouvian tax ) in which the amount of the levy on the estimation of external costs is based, calculated as incentive taxes. Through a rebate to citizens and businesses remains the overall burden largely tax - neutral rates ( revenue neutral ).

Also, the truck toll, the water penny (water penny ) and environmental taxes in Germany can be viewed under the aspect of the internalisation of external costs. Also certificates can mitigate the effects of external effects.

As a counter- example of this costs can be externalized. Here, the arising and even costs to other regions or to subsequent generations are circulated. Especially in the classic case of market failure, this alternative is used regularly.

Examples

The table is intended to give examples of a number of possible external effects.

Example: A craftsman into an apartment from a repair job. The following persons are affected:

• The apartment owners (based on the transaction he benefits in the form of a positive internal effect ),
• The wife of the apartment owner (positive externality )
• The resulting noise disturbs the neighbors (negative externality ).

A government intervention could be done in this case by the compensation of the neighbors, so that he will be compensated for the damage negative external effect. At the same time the wife could be required to contribute to the attainment of the external benefit.

External costs of energy production

The external costs in the energy sector are based primarily on the emission of pollutants in energy conversion, in turn, cause damage to the health of humans and animals as well as of ecosystems, as well as from the emission of carbon dioxide as an important greenhouse gas. Additional factors play a role. The estimates for the cost of carbon dioxide emissions scatter quite strongly; in the literature values ​​between 15 € per tonne to € 280 per tonne can be found. As a more realistic estimate of € 70 per tonne to be specified. The Federal Environment Agency calculated for the year 2010 in Germany following external costs in the electricity sector:

• Mix Germany ( with nuclear power ): 7.8 € cents / kWh
• Mix Germany (excluding nuclear power ): 7.0 € cents / kWh
• Mix renewable energy Germany: 1.8 € cents / kWh

External costs of transport

For the transport sector: creates environmental costs of around 2.6 € cents / tkm During a heavy truck on average, they have there with an electrically operated freight train only 0.3 € cents / tkm. This represents a decrease of environmental costs per tonne- kilometer is around 90 percent. Car call environmental costs of an average of 3.1 € cents per passenger-km ( petrol ) or of 4 € cents / pkm ( diesel cars ) produced in electric railways, there are only 1.2 € cents / pkm and buses only 2.1 € cents / pkm.