It was established under article 280 of Indian Constitution by President of India. It was formed to define financial relationship between centre and state. As per constitution commission is formed for every five years and consists of chairman, secretary and four other members. In case of any financial disputes among centre and state governments, solution is sought according to provisions of constitution. Finance of the state government, central government and the relationship between the two is called as Federal finance.

That means that the imposition of this type of tax will reduce the market outcome of the externality to an amount that is considered efficient. There are solutions that exist to overcome the negative effects of externalities. These can include those from both the public and private sectors. Many corporations pass the cost of externalities on to the consumer by making their goods and services more expensive.

• An externality is a cost or benefit caused by a producer that is not financially incurred or received by that producer.
• But such a monopoly would have to be carefully controlled by the state to prevent the private group from exploiting such a powerful ownership right in unsocial ways.
• Lured by these super normal profits, new firms will enter the industry causing supply curve to shift to right.
• Businesses in the same industry tend to cluster in together.
• Infrastructure economies of scale arise when public infrastructure is put to profit in the industry.

Further, B’s utility of consuming clean air is affected by individual A’s smoking. D) Laborers are available without difficulty since skilled laborers migrate to that area. C) Credit facilities are available due to the establishment of banks and other financial institutions.

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The total value of all goods and services produced in a country in a year is called National Income. Real wages refers to the number of goods and services that can be purchased with the money wage. When a firm makes expenditure on sales like advertising in journals, newspapers, electronic media etc. to improve sales is called as Selling costs. Price Elasticity of Demand is the percentage change in quantity demanded of a commodity because of change in its price.

Factors that contribute to such advantages are outside the control of firms. Therefore, no firm gets a competitive advantage over others since the benefits are available equally to all firms. When firms within the same industry cluster together, they can take advantage of the existing infrastructure and supply networks. Moreover, skilled workers tend to shift close to such clusters for work, thereby giving firms easy availability to labor. In the above table total product refers to the total output produced per unit by all the labourers employed.

The social benefit far exceeds his own private benefit. They are available to everybody whether a person pays for them or not. Thus they are not subject to the exclusion principle. Another characteristic of public goods is that their benefits are provided at zero marginal cost.

External Economies of Scale: Definition and Examples

Thus far in virtually all social systems they have been coped with on an ad hoc basis. The main force of Pigou’s treatment of the subject is that the “social cost” of producing a ton-mile of freight is 3.5 cents (3 cents for the railroad’s own costs, plus 0.5 cents for the destroyed crops). The policy prescription is that the railroad should be made to pay farmers for their destroyed crops or that railroads should be taxed or restrained in other ways that will prevent damage. Infrastructure economies of scale arise when public infrastructure is put to profit in the industry. In the diagram ‘X’ axis represents the employment and ‘Y’ axis represents price, AS is aggregate supply curve AD is aggregate demand curve. The point of intersection between the two ‘E1’ point.

TU curve represents total utility and MU curve represents marginal utility. TU curve is maximum at 5th unit where MU curve will become zero. TU curve slopes downwards from 6th unit, while MU will become negative. As per the nature of costs, both AC and MC curves gradually decrease, reach to external economies accrue due to minimum and gradually increase there after along with increase in level of output. It is to be noted that both AC and MC curves will have ‘U’shape implying three phases i.e decreasing, minimum and increasing. The demand curve in case of normal goods slopes from left to right downwards.

The price of corn is fixed at Rs. 15, per quintal to cover the cost of cultivation. 1st Stage Increasing returns at 2 units, Total output increases, Average product increases and Marginal product reaches maximum. The law of diminishing marginal utility is the basic law of consumption. Real wages refers to amount of goods and services that can be purchased with the money wage at any particular point of time.

For instance, the state can levy a tax on every family and pay the sum so collected to the smoke factory to move away. In the case of external economies of production, the state can give subsidies to producers so that national dividend increases and the ideal output is attained. When an industry expands in response to an increase in demand for its products, it experiences some external economies as well as some external diseconomies. If external diseconomies outweigh the external economies, that is, when there are net external diseconomies, the industry would be an Increasing cost industry.

When Total utility increase at diminishing rate, marginal utility falls. In the study of economics, the application and use of statistical methods are of great importance. Most of the doctrines of economics are based on the study of a large number of units and their analysis. Law of demand was formulated because of statistical methods.

There exists no direct contacts between the employers and laborers. As a result, strikes and lockouts frequently take place. Now, more employment of labour will lead to a fall in TP and MP will be negative.

It may run subsidised canteens, provide creches for the infants of women workers and recreation rooms for the workers within the factory premises. It may also provide cheap houses, educational and medical facilities for the families of workers and recreational clubs outside the factory. Though the expenses on such facilities are very heavy, yet they tend to increase the productive efficiency of the workers which helps in raising production and reducing costs. But it is in manufacturing industries where great gains–apparently resulting from exploiting both the dynamics of the division of labor and economies of scale–have eventually occurred. The action of an individual or organization often results in positive private gains but detracts from the overall economy. Many economists consider technical externalities to be market deficiencies, and this is the reason people advocate for government intervention to curb negative externalities through taxation and regulation.

Consumption Externalities

For instance, sugar industries make power, alcohol out of the molasses. Technical economies have their influence on the size of the firm. Generally, these economies accrue to large firms which enjoy higher efficiency from capital goods or machinery. Bigger firms having more resources at their disposal are able to install the most suitable machinery.

Definition of Internal Economies of Scale

If an industry expands as a whole, its growing demand for the various factors of production, like labour, capital, raw materials, etc. may eventually raise their prices. The localisation of industries may lead to shortages of transport, power, labour, raw materials and equipments. All such external diseconomies tend to raise cost per unit. We have explained above the external economies which accrue to the firms as a result of the growth of the industry. But, as said above, the expansion of an industry is also likely to generate external diseconomies which raise the cost curves of the firms.

They were labeled “pecuniary external economies,” however, by Scitovsky . Consider the example where the steel industry enjoys high profits. It expands its capacity and consequently increases its output. The cost to steel-using industries thus falls, and they enjoy higher profits. Their enhanced profits, although external to the steel industry, may be attributed to additional investment in the steel industry. Thus industry expansion stimulates the division of labor.

Real wage is the purchasing power that a labour gets through his money wage. The law of demand states that there is an inverse relationship between price and demand for the commodity. If the price of the good increases then demand decreases and if the price of the good decreases then demand increases other things being constant. The total income so generated is equivalent to the total value of the additional output produced. Such income creates additional demand necessary for the sale of the additional output. The fixed costs of a firm are those costs that do not vary with the size of its output.

Any disequilibrium between aggregate demand and aggregate supply equilibrium adjusted automatically. This changes in the general price level is known as price flexibility. The theory of output and employment developed by economists such as Adam Smith, David Ricardo, Malthus is known as classical theory.

In this article we will discuss about the internal and external economies of a firm. As an industry develops, all the firms engaged in it decide to divide and sub-divide the process of production among themselves. For instance, in case of moped industry, some firms specialize in rims, hubs and still others in chains, pedals, tires etc. It is of two types-horizontal disintegration and vertical disintegration.

Supply means quantity which is brought to market for sale. It arises because of scarcity and alternative use of the resource. It is the cost of a factor that is foregone from the next best alternative use. Hence the demand curve for Prestigious goods slopes from left to right upwards.