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In economics a spillover is an economic event in one context that occurs because of something else in a seemingly unrelated context. For example, externalities of economic activity are non-monetary spillover effects upon non-participants. Odors from a rendering plant are negative spillover effects upon its neighbors; the beauty of a homeowner's flower garden is a positive spillover effect upon neighbors.
In the same way, the economic benefits of increased trade are the spillover effects anticipated in the formation of multilateral alliances of many of the regional nation states: e.g. SAARC (South Asian Association for Regional Cooperation), ASEAN (Association of South East Asian Nations).
In an economy in which some markets fail to clear, such failure can influence the demand or supply behavior of affected participants in other markets, causing their effective demand or effective supply to differ from their notional (unconstrained) demand or supply.
Another kind of spillover is generated by information. For example, when more information about someone generates more information about people related to her, and that information helps to eliminate asymmetries in information, then the spillover effects are positive (this issue has been found constantly in the economics and finance literature, see for instance the case of local banking markets[1]).
History of the Concept
19th century economists John Stuart Mill and Henry Sidgwick are credited with founding the early concepts related to spillover effects. These ideas extend upon Adam Smith's famous ‘Invisible Hand’ theory which is a price that suggests prices can be naturally determined by the forces of supply and demand to form a market price and market quantity where buyers and sellers are willing to make a transaction. Spillover effects, also known as externalities in market theory are the costs associated with a transaction borne upon a party/parties that are non participants in the transaction (ie, Production costs do not consider the cost of pollution on society at large). Furthermore, Mill argues that Government intervention in the market can be a useful tool when necessary to prevent or mitigate spillover effects when necessary[2] as opposed to Adam Smith who believed a competitive market with little to no intervention provides the most adequate outcome.
See also
References
- ^ Garmaise, M. & G. Natividad (2016). "Spillovers in Local Banking Markets". The Review of Corporate Finance Studies. 5 (2): 139–165. doi:10.1093/rcfs/cfw005.
- ^ Medema, Steven G. (1 September 2007). "The Hesitant Hand: Mill, Sidgwick, and the Evolution of the Theory of Market Failure". History of Political Economy. 39 (3): 331–358. doi:https://doi.org/10.1215/00182702-2007-014.
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