Introduction
Externalities are the impact of economic entities participating in a particular transaction on third parties who are not involved in the deal. These are factors that are not taken into account when determining the gross national product but have an influence on people’s welfare. In order to analyze the effect of this phenomenon in more detail and to assess profit externalities, it is required to consider the classification of these economic components and what they are. Such a description will give an opportunity to assess the degree of their impact on the economic environment and help to determine if profit externalities can be useful for business.
Positive Externalities
Positive externalities are the beneficial effects of economic entities participating in the transaction of third parties. They are the utility that is not reflected in prices. According to Dragone, Lambertini, and Palestini (2014), with a positive external effect, marginal social utility exceeds marginal individual utility. Due to the fact that third-party external beneficiaries do not take part in the conclusion and execution of transactions with this commodity, their profits are not taken into account when concluding such transactions, and equilibrium prices and quantity established in the market differ from those that would be received in this manner.
The result of positive external effects is the inadequate production and understatement of a certain product’s price, which leads to a decrease in the efficiency of the economy (Agafonow, 2014). Therefore, in order to ensure an effective output volume, a mechanism is necessary through which third parties, using the external effect, would contribute to its production and consumption. At the same time, one part of the contribution would be aimed at reducing the price paid by consumers in order to stimulate the growth of their consumption. The other part would be used to compensate for any increase in marginal costs in order to encourage producers to increase output.
Types of Profit Externalities
Profit externalities can be assessed from the point of view of their impact on economic activities by categorizing them. According to these groups, certain utility functions are performed, which should be taken into account when drawing up transactions. All the categories are relevant and may be applied to relevant financial activities. Based on specific principles of utility, market participants regard the importance of these externalities differently.
The marginal individual utility of goods is the utility received by a person buying the additional unit of a specific product (Möhlmeier, Rusinowska, & Tanimura, 2016). In order to extract this parameter associated with the given volume of goods, it is necessary to add to marginal utility extracted by third parties. The marginal external utility of a product is the marginal gain extracted by third parties who are neither sellers nor buyers of the goods (Möhlmeier et al., 2016). The aggregate external utility is the general satisfaction that a person receives from consuming a specific product volume (Möhlmeier et al., 2016). All these data are useful in the financial sphere and are an integral component of the topic related to profit externalities.
Conclusion
The degree to which profit externalities affect business and modern economic activity can be assessed by analyzing the functions that they perform and their categorization. Depending on the type of transaction, different approaches to calculations are taken. The utility is one of the key parameters that are taken into account when considering profits externalities. Their types differ in the degree of satisfaction with goods and consumer estimates.
References
Agafonow, A. (2014). Toward a positive theory of social entrepreneurship. On maximizing versus satisficing value capture. Journal of Business Ethics, 125(4), 709-713. Web.
Dragone, D., Lambertini, L., & Palestini, A. (2014). Regulating environmental externalities through public firms: A differential game. Strategic Behavior and the Environment, 4(1), 15-40. Web.
Möhlmeier, P., Rusinowska, A., & Tanimura, E. (2016). A degree-distance-based connections model with negative and positive externalities. Journal of Public Economic Theory, 18(2), 168-192. Web.