Economic theory has assumed, at least since Pigou, that environmental externalities could and should be internalized into the price system. Pigou himself imagined that externalities would often be internalized through taxes or subsidies, a strategy that appeals to many environmental advocates as well as economists. Coase’s much-discussed alternative approach offers a different means of internalization, through negotiation; this is plausible under rare special circumstances, but it is a means toward the same end. This chapter explores the various methodology which externalities, such as environmental impacts, can be included into a nation’s price system.
