Internalization (economy)

Internalization is the inclusion of additional social costs / benefits ( cost accounting ) caused by external effects (also externalities) in the cost- effectiveness calculation of the causer. The aim of internalization is to minimize the inefficiencies caused by market failure (allocative market deficiencies) and thus to achieve optimum welfare .

Distinction

In general, one can differentiate between market and technological externalities. Market-based (pecuniary) external effects are understood to mean the effects of the actions of a person (or a group of people or the like) on an initially uninvolved third party, which are triggered by normal market processes. For example, an increase in the number of business administration students will lead to an increase in corresponding graduates entering the market. This will likely affect salaries and the like. for business graduates. However, market external effects are essentially unproblematic. Technological externalities, on the other hand, are of great interest from an economic policy point of view due to types of costs not internalized in market prices and the associated misallocations and corresponding inefficiencies .

Internalization instruments

The inefficiencies resulting from externalities can be overcome and internalized in various ways. Internalization means that the economic actor causing the problem is given an (economic) incentive to include the additional social effects in his decision-making process, with the aim of avoiding the corresponding welfare losses. In practice, this happens in different ways, both through private and state (public) actors. The aim is always to achieve a return to the economic optimum as far as possible.

Private internalization approaches

Conventions of a society

Above all, negative external effects are avoided by the fact that the actors follow rules of conduct. For example, people don't just dump their household rubbish on the street, not because the written public order stipulates it, but because they follow norms: "You just don't do that."

Helpfulness

In peaceful, free societies, non-profit institutions (foundations, associations, etc.) find great support from private actors in both monetary and natural (e.g. personal engagement) terms. This makes it possible to expand the range of positive externalities beyond the conventional market result.

Personal sense of responsibility

If you want to offset your CO2 balance, you can z. As the damage caused by flights CO2 emissions offset .
Deutsche Bahn AG offers this option when purchasing a ticket using the "Environment Plus" option and promises a "trip with 100% green electricity".
Both private households and employers can offset CO2 emissions. For example, the German Federal Government compensates for all business trips “from the beginning of the current legislative period”, ie from October 22, 2013.

Self-interest

In entrepreneurial activities, it can be advantageous to include externalities (mostly positive ones), for example by working in different business areas. For example, a furniture manufacturer could expand its field of activity and invest in reforestation and the protection of forest stands.

Contractual regulations

In the course of the private autonomy guaranteed by civil law , contracts can be concluded between private actors that internalize the effects of externalities (payment of compensation payments, patent law, etc.). In this context, the so-called Coase theorem plays a central role.

State internalization approaches

State interventions to correct inefficient market results due to external effects can result, on the one hand, in regulatory measures and, on the other hand, in market-oriented measures.

Regulatory (regulatory) measures

State regulations are direct interventions in the production and thus pollution processes of companies. This can be done, for example, by setting certain emission limit values or by prescribing environmental protection techniques, mostly independent of the specific situation of the company or economic sector. In principle, it is possible in this way to arrive at an economically efficient solution, but it is very unlikely due to legal provisions, a lack of information on the part of the authorities or other difficulties. In addition, there is usually no economic incentive for the companies concerned to reduce pollution below the legally required levels. For this reason, such measures should only be used if the achievement of a specific goal cannot be achieved through market-oriented solutions.

Market-based measures

In principle, the state has two options for correcting negative external effects. One of these options is issuing fees, known as Pigou taxes . A price is set for an external effect that has to be paid when it is caused ( e.g. € 10 per tonne of carbon dioxide emissions). So a Pigou tax creates a price for the right to a certain amount of pollution. For companies with marginal avoidance costs that are lower than the tax rate , an incentive is created to produce more environmentally friendly in order to reduce the tax liability. Unlike most ordinary taxes, Pigou taxes generate government revenue while increasing efficiency. If the amount of the tax is calculated correctly, the most economically efficient level of pollution can be achieved.
A second possible, market-oriented measure is certificate trading . The legalized trade in environmental certificates (pollution certificates ) will also set a price for pollution through the emerging market. The proceeds from this, however, do not primarily benefit the state budget, but rather companies with low marginal avoidance costs. Under certain conditions, the Coase theorem guarantees an optimal distribution of resources from an efficiency point of view.

The above approaches tend to focus on the internalization of negative external effects. An internalization of positive external effects takes place largely in the same way, for example by paying subsidies instead of collecting taxes.

As a counterexample, costs can also be externalized. The costs incurred and still to be incurred are passed on to other regions or to subsequent generations. This alternative is used regularly, especially in the classic case of a market failure .

Assessment criteria

The complete elimination of externalities is i. d. Usually economically not optimal. The aim of an efficient economic policy should therefore be to bring about the “right amount” of both positive and negative external effects. Various assessment criteria are available to evaluate the achievement of the objectives of the individual instruments:

Static efficiency

To what extent does a certain instrument lead to an optimum in the sense that a given goal can be achieved with the least possible effort (minimum costs).

Dynamic efficiency

To what extent does the instrument create incentive effects to go beyond an exogenously prescribed level in order to avoid negative external effects or to provide positive external effects as cheaply as possible.

Marksmanship

To what extent does an instrument achieve the goal specified for the externality in reality.

See also

• Internalization theory of multinational companies
• Examples of the internalisation of external costs: CO2 tax (Switzerland) , VOC tax , water abstraction fee , toll , electricity tax and other environmental taxes .
• The double dividend hypothesis describes the double profit from incentive taxes if they are redistributed to consumers and the economy.

literature

• Fritsch, Michael (2010): Market failure and economic policy: Microeconomic foundations of state action, 8th edition, Verlag Franz Vahlen.
• Mankiw, Gregory N . (2004): Fundamentals of Economics, 3rd edition, Stuttgart, Schäffer-Poeschel.
• Sadowsky, Tim / Steinhauer, Hans / Wagner, Sven (2007): PBSF in the main course: Ecological taxes and hybrid systems, Chapter 2.4: Internalization of external effects, University of Trier.
• Samuelson, Paul A. / Nordhaus, William D. (2005): Economics - The international standard work of macro and microeconomics, Landsberg am Lech, mi-Fachverlag (Redline Wirtschaftsverlag).
• Traub, Stefan (2007): Lecture Public Finance - Chapter 4: External Effects, University of Bremen.

Individual evidence

1. ↑ Compensation for climate damage , Der Spiegel, August 15, 2015
2. ↑ Federal Environment Agency, Voluntary CO2 Compensation: Still Many Open Questions, March 17, 2015
3. ↑ Bahn.de, CO₂-free on the move ( Memento of the original from January 29, 2016 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice.  
4. ↑ Federal government offsets all greenhouse gas emissions from business trips , Federal Environment Agency, December 16, 2015