Solutions to externalities

The solution to externalities is the internalization of external costs.

When the external economy occurs, private interests are less than social interests, which hinders private investment in this field, and its investment is far less than social demand. Environmental problems can be solved through government intervention and control, or based on market stimulus mechanism.

What these methods have in common is internalizing externalities, prompting all economic parties to choose the best scheme through cost-benefit comparison, so as to realize sustainable development.

Market failure and time-lag market mechanism can't effectively allocate resources according to people's wishes. It is precisely because the market economy cannot realize the optimal allocation of resources that the state needs to intervene in the market economy to achieve the purpose of optimizing the allocation of resources.

The main reasons of market failure are monopoly, public goods, externalities and incomplete information.

Externality exists widely in the real economy. Whether it is positive externality or negative externality, it will lead to market failure and affect the allocation of resources by the market.

Because of externalities, resource allocation is inefficient. In the real economy, both market participants and public departments manage externalities in various ways, so that the allocation of resources reaches or approaches the optimal level required by society.

Methods: The government can solve the external problems through direct regulation, taxation and subsidies. For acts with negative externalities, the government can levy taxes, and the amount of taxes should be equal to the losses that such acts bring to society.

The government can subsidize behaviors with correct externalities.

Externaleconomy, also known as external economy, refers to the income that a person or manufacturer cannot claim because of consumption or the output of other people and manufacturers.

It means that when the output of the whole industry (due to the increase of the number of enterprises) expands (external factors), the average production cost of each enterprise in the industry decreases, sometimes called ExternalEconomyofScale.

Since the reform and opening up, the scale of development has become an important indicator of the performance of major telecom operators. This has really played a very good role in developing the national economy.

However, one-sided worship of scale is absolutely not desirable. Excessive pursuit of scale growth will not only cause the above-mentioned problems of large-scale redundant construction, but also cause the growth of workers' actual welfare level to stagnate or even decline while economic growth.