Glamor Economics

Chapter 90

Chapter 12 Section 8 Why the Government Subsidizes Forest Farms——External Effects

As the leader of the economy, the government often implements some policies, such as price controls, tariffs, subsidies, etc.General business operations hope to receive government subsidies.But not all industries have the opportunity to receive such subsidies.

A large forest farm located at the junction of Inner Mongolia and Northeast China has received several million yuan in financial subsidies from the state.Many surrounding companies can't figure it out.Many people can't help asking: "Isn't the country focusing on the development of high-tech industries now? Why does it still support forest farms?" Zhang, the person in charge of the forest farm, said meaningfully in an interview with reporters: "We used to develop forest farms mainly by selling timber. Profit, as a company, we don’t think too much about the impact of the existence of forest farms on the surrounding ecological environment. Of course, the role of forest farms in improving the environment is obvious to all. Therefore, the state provides subsidies to us, and we are new A new forest farm was opened up and more tree species were planted."

As an enterprise, forest farms before receiving state subsidies only considered the profits from selling timber, and did not consider the effect of forest farms on improving the surrounding environment. Therefore, the area of ​​forest farms was too small to meet people's satisfaction.After receiving state subsidies, the forest farms have increased their forest area and further optimized the surrounding environment, which is a good thing for the society.In this process, the government has used subsidies to solve the problem of positive externalities.

Therefore, the positive externality is generally that the personal benefit is less than the social benefit, so the quantity provided by the individual is often too small.For example, in a family courtyard, a family installs a door light at the door for their own convenience, and passers-by will benefit. This is a positive external effect.However, since these benefits are enjoyed by passers-by, families who install street lights will only consider whether they need them.If he feels that the benefits of installing street lights are less than the cost of his own expenditure, he will not install them, otherwise, he will install them.However, at this time, due to the existence of great social benefits, from the viewpoint of efficiency, it is better to add devices, but obviously the willingness of private devices will not be too strong.

So, is there no solution to this externality?of course not.It is obviously not advisable to charge a fee for each passerby.Because it is impossible for passers-by to take a walk every night with a lot of change in their pockets, and drop a dollar to buy road money every time they pass by a door with street lights.Therefore, for positive external effects, the government should come forward to solve them.For the street light incident, the government can estimate the social benefits brought by the installation of door lights for each first-floor household, and then pay the cost to the first-floor households.At this time, the individual benefits and social benefits of installing door lights on the first floor are included, so the number of door lights installed by all households can reach the optimal number of the whole society.

Positive externalities don’t just exist in our daily lives. Technological innovation also has positive externalities because it creates knowledge that others can use.If a company knows that its innovative technology will be exploited by other companies, it will not innovate, or it will tend to conduct research with few resources.This is of course not conducive to the technological progress of the entire country.The patent law was established to solve this externality.The patent system enables inventors to use their inventions exclusively for a certain period of time.Other companies have no legal rights to use this technology.Thanks to patent laws, intellectual property rights are protected and technological innovation is promoted.

[links to related words]

External Effects External effects are the non-market effects of the activities of producers or consumers on other producers or consumers in actual economic activities.The theory of external effects points out that as long as the variables contained in one person's utility function are under the control of another person, there will be external effects.That is to say, in economic activities, one person's behavior or the use of certain resources affects the interests or welfare of others, but they do not use some means of exchange to coordinate the relationship between the two.

Positive and Negative Externalities Externalities can be beneficial or harmful.Beneficial effects are called external benefits, external economies, or positive externalities; harmful effects are called external costs, external diseconomies, or negative externalities.

(End of this chapter)