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Theoretical Causes of the Problem of External Effects

Journal: Herald of the Economic Sciences of Ukraine (Vol.39, No. 2)

Publication Date:

Authors : ;

Page : 180-185

Keywords : welfare; external effects; theoretical origins; institutional environment; transaction costs; state; society.;

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The theoretical leakage of external effects in economic theory is revealed. The external effect is manifested in the form of material costs of third parties that are not directly involved in the business transaction, that is, where the activities of individual entities negatively (or positively) affect the activities of other entities that are not with them in market relations. The idea behind the study is that the theory of external effects is based on the views of scientists who have formed under the influence of the institutional environment from which they came. It is revealed that the pluralism of British society, originating from the institutional environment of the country, became a prerequisite for the formation of two antagonistic theories of leveling external effects – the theory of A. Pigou and R. Coase. According to A. Pigou theory, external effects are derived from unregulated markets. Based on the fact that external effects are derivatives of the free market (which defends neoclassicism), which make it impossible to maximize production efficiency (according to the marginalization theory), A. Pigou concludes that the state should take measures to overcome them. R. Coase held the opposite view, since the quintessence of his theory was transaction costs. According to R. Coase, such costs are much higher in terms of government regulation of economic activity than in direct contact with economic entities. That is, mediating actions of the state (redistribution of a resource and a product between subjects), costs society more expensive, than the direct agreement between subjects. It follows that, as a whole, it is more profitable for society to solve the problem of external effects at the producer and recipient level than to rely on the issue on the state. Analyzing the theories of external effects, it is found that A. Pigou considered social welfare in a qualitative dimension, while R. Coase quantified. It is established that the basis of A. Pigou theory is based on the principle of marginal utility, according to which, moving the product from wealthy to less wealthy citizens should maximize the quality of life of society as a whole; R. Coase, in his turn, interpreted social well-being as the aggregate of individual material gains that citizens had to grow by minimizing transaction costs. It was found that each of the researchers initially inferred the problem of external effects from their own ideas about well-being, and therefore their theories were mixed.

Last modified: 2021-03-17 02:30:51