Conceptual challenges for internalising externalities

We analyse a number of different externalities to identify conceptual challenges for the practical implementation of their internalisation. Three issues were identified: i) The balance between compensation and technology change and the respective effects on the nominal and real GDP;
ii) The relevance and efficiency of different instruments for internalisation and compensation; and iii) Implementing internalisation over large geographical and temporal distances. We find taxation to be a more relevant and efficient tool for internalisation than insurance and litigation. With increasing geographical and especially temporal distance between the benefitting actor and the victim of the external cost, the involvement of a non-governmental intermediate actor becomes increasingly necessary to provide the short-term capital required to ensure a successful implementation.