Importance Of Internalization Of Externalities

Externalitiy is a very common economic phenomena existing in the current market, and it is also one of the main reasons leading to market inefficiency as well as policy inefficiency. Despite the history of this concept was not so long among other economic theory, it instead plays an very important role in the economy, especially in the field of environmental economy. It is worthwhile to say that internalization of externalities has been discussed by people many years and it is of significance to address so many current environmental issues as pollution, climate change. Additionally, many new economic ideas such as government intervene and property right theory indicated by neo-classical economists are intended to evoke the solution to address …show more content…
In the economics, the cost of producers is consist of three parts, first is that the labor cost and anticipated value for products, the second is that the resource cost of product and the cost for protection and maintenance of the environment in the process of manufacturing is the third part. However, without external force, the real cost of a company is subject to the first and second part while pushing the company to consider the third part with external force will be the essential tool to address the environmental issues. In the other words, only when the externalities had been internalized will the environmental protection come true by means of reducing the pollution from company …show more content…
Firstly, the environmental tax is better than the cap and trade system in terms of its competence in stability and controlling the variety of pollution. To illustrate, it is no doubt that the environmental tax has the advantage of stability because it is set officially by the government as a regulation and it is conducted by the specific department within government in order to keep this regulation stable. At the same time, the government can directly acquire the needed funding for public revenue expenditure and for some acclivities that are supposed to protect the environment such as providing public environment advertisements, improve sewage treatment from the environmental tax. What’s more, the environmental tax is better than the cap and trade system because government has ability to monitor the total cost of firms by means of calibrating the tax rate. Eventhough the cap and trade system seems like a more advanced tool as a synthesis of government regulation and market efficiency than the environmental tax, some of its drawbacks determine its role that it can not be the best tool for internalization of externalities. Firstly, cap and trade system is characteristic of economic tool since the carbon and pollution can be traded in the market. Therefore, it might be used as a tool for speculation if applying