Economics
External Economies
External economies refer to the cost savings and efficiency gains that result from factors outside of a firm's control, such as the overall growth and development of an industry or region. These external factors can lead to increased productivity, lower costs, and improved competitiveness for businesses operating within the affected area.
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4 Key excerpts on "External Economies"
- Meine Pieter van Dijk, Roberta Rabellotti(Authors)
- 2005(Publication Date)
- Routledge(Publisher)
direct effects enter the concept, or ‘real’ effects in the sense that they have technological consequences. Hence, external effects influence the productivity of firms. They come free of charge and occur incidentally. Furthermore, they are unplanned, and apparently, have general consequences. They cannot be ‘pecuniary’ in the sense of inducing changes in profits, because that is not relevant to the issue of Pareto-efficiency. All that matters is the difference between social and private costs.In theories about industrialisation in developing countries, on the other hand, External Economies are ‘invoked whenever the profits of one producer are affected by the actions of other producers’, either through direct or through indirect relations [Scitovsky, 1954:146]. External Economies that are due to interdependence through the market mechanism are said to be ‘pecuniary’. Consequently, they are more prevalent than ‘real’ effects. This explains why, according to Scitovsky, ‘one gains the impression from the literature on underdeveloped countries that the entrepreneur creates External Economies and diseconomies with his every move’ [ibid.].Marshallian External Economies are direct and indirect with respect to market-intermediation. On one hand, they are direct, for example in case of a local milieu enhancing the quality of human resources. As Marshall put it: ‘great are the advantages which people following the same skilled trade get from near neighbourhood to one another. The mysteries of trade become no mysteries: but are as it were in the air, and children learn many of them unconsciously’ [Marshall, 1964:225]. So, tradition and near neighbourhood enhance the quality of human resources. The quality of business and of productive services may similarly be improved.The effects that Marshall described for the generation and diffusion of innovations may also be indirect. In a spatial cluster, ‘good work is rightly appreciated, inventions and improvements in machinery, in processes and the general organisation of the business have their merits promptly discussed: if one man starts a new idea, it is taken up by others and combined with suggestions of their own: and thus it becomes a source of further new ideas’ [ibid.]
eBook - ePub- E.J. Mishan, Euston Quah(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
Part IV External effects 16 Introduction to external effects 1 External effects, an abbreviation for External Economies and diseconomies – sometimes referred to as ‘externalities’, more picturesquely as ‘neighbour hood effects’, somewhat vapidly as ‘side effects’ and more suggestively as ‘spillover effects’, or briefly, ‘spillovers’ – first appear as ‘External Economies’ in Alfred Marshall’s Principles (1924) in connection with a competitive industry’s downward-sloping supply curve. Marshall’s argument is that, as industry expands by, say, an additional firm, any resulting reduction in the average costs of production accrues to all the firms in the industry. The total reduction in costs experienced by all the intra-marginal firms is to be attributed to the entry of the additional firm. The true or ‘social’ cost of the additional output produced by this marginal firm is not the total cost of it as calculated by that firm, but this cost less the total savings in costs by all the intra-marginal firms. This proposition is important in determining the ‘correct’ or ‘optimal’ output of the industry. For in practice, the additional firm makes no allowance for the savings in costs it contributes to the rest of the industry. If, therefore, firms continue to enter the competitive industry until, at the going price of the product, the total cost of the firm is equal to its total revenue, the equilibrium size of the industry will be that at which the market demand price is equal to the average (inclusive) cost of the good in question. But the marginal cost, or total cost of the incremental firm, will be below average cost by the amount of the total cost-savings it confers on the intra-marginal firms. Therefore, marginal cost will, to the same extent, be below the market price and, abiding by the marginal-cost pricing rule, output should be extended beyond the competitive equilibrium until marginal cost is equal to price
eBook - PDF- Kumar, A(Authors)
- 2021(Publication Date)
- Daya Publishing House(Publisher)
Chapter 3 Externalities Meaning, Sources and Types Externalities arise when certain actions of producers or consumers have unintended external (indirect) effects on other producers or/and consumers. Externalities may be positive or negative. Positive externality arises when an action by an individual or a group confers benefits to others. A technological spillover is a positive externality and it occurs when a firm’s invention not only benefits the firm but also enters into the society’s pool of technological knowledge and benefits the society as a whole. Negative externalities arise when an action by an individual or group produces harmful effects on others. Pollution is a negative externality. When a factory discharges its untreated effluents in a river, the river is polluted and consumers of the river water bear costs in the form of health costs or/and water purification costs. In an activity generating positive externality, social benefit is higher than private benefit and in an activity generating negative externality, social cost is higher than private cost. Thus, in the presence of externalities, social benefits (costs) and private benefits (costs) differ. The divergence between private benefits (costs) and social benefits (costs) results in inefficiency in resource allocation. Producers of externalities do not have any incentive to take into account the effects of their actions on others. In a competitive market economy, private optimum output is determined at the point where marginal private cost equals price. When a positive externality occurs, the marginal social benefit will be higher than the marginal private benefit (price) and hence the private optimal output will be lower than the social optimal output. When a negative externality occurs the marginal social cost will be higher than the marginal private cost (price) and This ebook is exclusively for this university only. Cannot be resold/distributed.
eBook - PDFWelfare Economics
Towards a More Complete Analysis
- Y. Ng(Author)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
7 Externality It was noted in Chapter 2 that an equilibrium situation of a perfectly competitive market economy is Pareto optimal under certain conditions. One of these conditions is the absence of (unaccounted for) external effects. However external effects are pervasive. External effects in the form of envir- onmental disruption have attracted both academic and public attention for decades (see for example Papandreou, 1994; Stavins, 2000). This chapter considers how external effects can cause non-optimality, and how this can be alleviated. But first we shall discuss the concept and classification of external effects. 7.1 The concept and classification of externalities Obviously, for an external effect to be present there must first be an effect. Some party, K (the affecting party) must produce an effect on some other party, J (the affected party). The effect must not just be present but must also have a positive or negative welfare significance. For example if water from my neighbour’s garden hose flows into my garden, a physical effect is there. But if I do not care about it one way or the other, it cannot be said that an externality exists. Second, the affecting party is usually a person, a group of persons or something that is under the control of persons (animals, institu- tions and so on). It is possible to speak of the external effects of, say, wild animals and use this to justify certain measures against them. But the usual methods of tax/subsidy, bargaining and so on will not be applicable. The affected party is also usually a person/group of persons or something owned by persons. However if the welfare of non-human beings, such as animals, enters into our objective function, then it is quite logical to include them as possibly affected parties. The mere presence of a welfare-relevant effect by one party on another does not necessarily constitute an externality; additional conditions are needed for the effect to be considered external.
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