The Status of External Effects in Conventional and Islamic Economics

“External effects” in the conventional economics can be defined within the framework of market mechanism and the Pareto's optimality. This issue has seldom been discussed in the works on Islamic economics. Using an analytical method, this paper explains the conceptual link between external effects and market mechanism in conventional economics, and criticizes it from the point of view of Muslim economists. Then, the status of external effects in Islamic economics is explained. Based on the research findings, external effects can contribute to Islamic economics in two ways: extracting a conceptual framework from conventional economics and proposing a new term in accordance with the special structure of the optimal Islamic allocation. While the first method faces some problems and limitations, the second method can provide the ground for authentic theorizing in Islamic economics. In the newly proposed concept, external effects do not mean the effects that are outside market mechanism; rather, they mean the mechanism that disturbs the optimal allocation advocated by Islam.