On Internalization of Externalities

Abstract

"Externalities can be internalized through market mechanism, government regulation, or self-governing institutions or a mix of these institutions. We recommend the institutional route which minimizes total cost (sum of technology, management, and transaction costs) to the firm. These costs are influenced by the externality attributes (occurrence, polluter, spatial, time, and technology). Different institutions may be appropriate for different stages and social contexts of an externality."