Question

what is meant by externalities? what the method of internalising the externalities

Answer 1

Internalizing the externality means shifting the burden, or costs, from a negative externality, such as pollution or traffic congestion, from outside to inside (external to internal).

An example in the case of pollution would be pollution rights. Instead of placing the burden (the costs of higher pollution) on people breathing air, a government would place a monetary tax on pollution. The tax would be in the form of pollution rights that companies would bid on and purchase from the government. So, if a company wants pollute more, they would have to pay more money for more pollution rights. This shifts the burden (the costs of higher pollution) from outside the company to inside the company.

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