Negative externalities in public redistribution system occur when the funds flow reduce, not increase, the welfare of citizens. Although public welfare systems are created to mitigate and prevent the hardship of the poor, they may result in inefficiencies. For example, if a family is paid, say, $200 per child each month, there would be parents who give birth to 5-7 children just to get enough money for living and do not care about their children’s education or socialization.
In Ukraine welfare payments are too low for the majority of people, so a better example of negative externalities would be state scientific institutions. The salary level there is very much lower than in business or abroad, but high enough to ensure passable living conditions and still considerably higher than in some other industries. People who work in scientific organizations do not want to go elsewhere because of the switching costs. Also they do not face any competition because reasonable young people go to areas with higher income expectations; talents who are capable of getting things done have abandoned the ship. As a result, the government money is channeled to organizations and people who: (a) make little contribution to the total benefit of the country; (b) are not going to exchange a passable income for uncertainty of doing something else.
I think a more efficient situation would be characterized by either much higher or much lower level of salaries. The key point is competition. If salaries are higher, smarter people will compete for the money and pay back the R&D investment in full. If the salaries are lower, employees will have more incentives to try something else and become successful. If only success in this country is measured by work completed, not effort spent to violate the laws.
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