Creating Markets, not only fixing them

Exploring and understanding of externalities is also important in your stud-ies. It is an important factor that we consider in the political or economic decision-making process (or more precisely in the preparation of the deci-sion-making process).

Externalities when the well-being (profit-costs or utility level) of an eco-nomic operator (producer or consumer) is directly influenced by the activities of another economic operator, i.e. not through the price system. We are talk-ing about effects that are not caused by the price system, that is, by the func-tioning of the market mechanism¹²².

How the decisions of economic agents are able to influence the decisions of other players by mediating equilibrium prices. For example, if a new pro-ducer enters the market for a product, the profits of the other propro-ducers will change as well, and this will not leave consumers' welfare intact. Although the activities of the new entrant have an impact on the profitability of other producers and on consumer welfare, we do not call this effect an externality,

121 Mazzucato Mariana (2019): Value of Everything: Making and Taking in the Global Economy.

Great Britain, Penguin Books

122 Hal R. Varian (1992): Microeconomic Analysis. New York, Norton International

since the effect of this is on the price system through the operation of the market mechanism¹²³.

For the same reason, it is not considered an external effect if, for example, an increase in income due to a tax cut affects the welfare of other economic operators through changes in equilibrium prices. The study of externalities is particularly important because, in our microeconomic studies so far, we have found that the market mechanism coordinates the activities of economic op-erators through the price system, leading to Pareto-efficient states. This may not be true for external effects.

Note that if the ownership rights for external action are clear and if the par-ties have the opportunity to negotiate with each other, a situation is created as if there is a market for the underlying rights (mutually beneficial win-win situation). If the parties can begin to bargain free of charge for changing the original situation, all that is done is to create a hitherto lacking market for the free sale of the rights in question. As soon as the sale and purchase of these rights are completely free and there are no other obstacles to the transactions, the resulting situation will be effective markets¹²⁴.

The state and government have prominent and non-transferable roles in two important areas: one is to protect the present society and health and environ-ment; the other is to shape the future generation through education and envi-ronmental protection. The rest (development of infrastructure, support of ag-riculture, assistance to private enterprises, etc.) follow. So, research develop-ment has always been overshadowed in our history. Just think of the two R&D drivers: aerospace and military¹²⁵. Let us ask: What do we spend more on Public Health insurance or space research?

If no one can be excluded from consuming an animal, and if the animal can be used by an unlimited number of consumers without shortening each other in any way. In other words, if consumers of a given commodity do not rival each other, then the commodity in question, distinguished from commodities to which the above criteria do not apply, is called a public good.

The opposite of public goods is private goods. So far, our microeconomic studies have focused exclusively on private goods. Private goods are prod-ucts and services that are subject to foreclosure (for example, those who do

123 Michael E. Porter (1998): On Competition. New York, Free Press.

124 Coase Ronald (1974): The Lighthouse in Economics. Journal of Law and Economics. 357-376.

125 Veres Lajos (2017): Appreciation of the State Role in the Economy. Polgári Szemle. 116–132.

not pay for them cannot participate in the consumption of the good) and sumers rival each other. The consumption of one consumer reduces the con-sumption of the other.

Since the exclusion criteria and the lack of rivalry criteria jointly define the public good, there are obviously temporary cases where only one of the two criteria is met. Goods, where both the impossibility of exclusion and the lack of rivalry exist at the same time, are called pure public goods. Transitional cases bear certain features of public and private goods. It may be possible to exclude some of the consumption of a given commodity, but consumers of the commodity do not shorten each other. But it may also be possible to ex-clude an animal from the consumption of an animal, but the more people have access to the animal, the less valuable it is to them. To distinguish these cases from pure public goods, they are called mixed goods or unclean public goods.

In the Middle Ages, tolls were levied on users of roads and bridges; later in most places, the state made the use of roads free of charge; and since the end of the twentieth century, more and more places have been paying for the use of roads. Public service television broadcasting is accessible to everyone, but at low cost, broadcasting can be coded and some can be excluded from con-sumption. Some commercial taxes also make use of this possibility¹²⁶. Providing such leadership, the State makes things happen that otherwise would not have. Not only does it stimulate the economy through interest rate policy and redistribute collected taxes, but it also finances basic research, maintains research institutes, finances education, and maintains universities, or healthcare. Through these added values, the state only profits indirectly through taxes. But is it justifiable that the state acts for the public interest and is a courageous actor in the economic system? The characteristics of public good and the role of externalities lead to an understanding of the possibilities of the State. There is not only a narrow view of what the State can invest in or what (in the economical role) policy options are acceptable¹²⁷.

Anyone who takes the risk gets a profit in modern capitalism. To understand the fundamental role of the State in the pioneer innovation sector, we have to recognize the collectivizing power of the state.

126 Porter Michael (2000): Locations, Clusters, and Company Strategy, New York, Oxford Univer-sity Press.

127 Milton Friedman(1979): Crowding Out or Crowding In? The Economic Consequences. NBER Working Paper.

Private investors often follow a predetermined path. Thus, in the hope of growth in business, they do not have to go through many walked paths or dead ends. The need to deploy and to prove new technologies appears both the supply slice, but also on the demand side. The question arises as to what recognition the state will receive for the work it is invested in: especially from the most pressing social and technological challenges.¹²⁸