Question

Is profit (the difference between output value and input cost) a good metric for investment capital allocation? What are externalities?

Answer 1

* Is profit a good metric for investment capital allocation?

Profit or also known as return on investment capital shows companys efficiency.

Return on investment shows how company is using its investment values to generate returns.

Return on investment used as benchmark.

ROIC( Return on investment capital )= Net operating profit after tax ​/ invested capital.

ROIC is compare with investment value to determine whether company is creating value or not .

So ,yes profit or return is good metric for investment capital.

*What are externalities?

When third party has no control on cost and benefit but the third party received cost and benefit of activity that is known as externality.

It is an economic term.

Generally two types of externality : * positive externality

* Negative extrenality

Third party can be a individual , organization, society.

In economy when production and consumption of goods and services effect the third party ( other business, firm and company) that is not directly related to the activity but received return or cost .

In positive externality ,the third party effected in a positive way.

In negative externality, the third part effected in a negative way.