Economic forces

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Economic forces are the factors that help to determine the competitiveness of the environment in which the firm operates.[1]

These factors include:[2]

  1. Unemployment level
  2. Inflation rate
  3. Fiscal policies
  4. Government changes

These factors determine an enterprise’s volume of demand for its product and affect its marketing strategies and activities. The economic system is made up of three main steps. The first one being production and then there is distribution of the produced goods and then the last step is consumption of the same. Now all this is possible because of two factors- Human resource and Natural resource.[3]

Natural resources include the raw material which is generally used in the production process, and human resources help to convert the raw materials to finished products which are then ready for distribution.

External costs[edit]

When an economic activity is carried out, it mostly affects the environment and the effect is adverse. This is the case of a firm which pollutes the environment. The society considers the cost of cleaning up of the environment as a relevant cost but the firm doesn’t. But when the negative effects of pollution and the cost of treatment are added, the total cost most of the times adds up to be more than the production cost. And when this cost is added to the production cost, the overall price becomes higher and leads to a fall in demand of the product. With this again the pollution level is reduced.

Taking another example where a firm pollutes and throws its waste in a private pond. The owner of the pond may charge the firm the polluting cost and the firm has to pay. But if the same firm dumps its waste in a river, it does not have to pay anything as the river is a public good. But the dumping of the waste in the river causes many environmental problems. It damages the aquatic life, may lead to a lower water standard and health problems.

Hence to reduce the pollution emissions from these firms in water and air, a pollution tax can be charged from these firms which can be indexed (in slabs) in accordance of the pollution level done by the firms.

Cost–benefit analysis[edit]

A cost–benefit analysis compares the benefit from the reduction in pollution to the cost that would be incurred to reduce the pollution level[citation needed]. Here benefits can be both environmental as well as health benefits.

Everyone, ideally, would love to live in a pollution-free environment. But technology used most times do emit pollutants. these pollutants affect human health as well as environment. Hence there is an urgent need to find the optimum economic level of pollution reduction.

But with changed circumstances, the optimum level also changes. Due to improved technology the pollution reduction cost will also go down.

During the period 1990-2000, 3M Corporation reduced its air pollution by 88%, water pollution by 82% and waste by 35% by using eco efficiency program.

Cost-Benefit Analysis takes into consideration only those benefits which can be measured in terms of money. It does not consider the aesthetic benefits which is and always has been a vital part of the environment like a beautiful clear running stream.


  1. ^ Economic forces, Business Dictionary
  2. ^ Economic Forces, Investor Words
  3. ^ Economic Forces, Connexions