There are 2 ways to internalized an , the first one is to define better property rights, and the second entrepreneurial creativity.

In thecase of mal-defined property rights, we have what is called the tragedy of the commons, when people using a resource resource impose costs on another, for example, in the case of deforestation, we have some resources (land and wood) that are collective owned.

In the case someone could notice that he could consume the capital of the collective owned resource (using the land without proper care, cutting the trees without replanting), and this would be in the long run diminishing the income and wealth of everybody, but even if the individual doesn’t intentionally consume capital, the problem may exist, because no one has any knowledge about the income of the collective owned resource and the total capital available.

Correct defining property rights would end both problems, first that with everyone having their own property, no one could consume another one’s resources (of course, supposing that nobody breaks the law) without their permission, that would mean that if you consume your amount of capital, you would be the most affected person in the situation (other persons would be affected in the way that the supply of goods would decrease, because the market is a cooperation system, but the income of the individual would be the most prejudiced), and creating disincentives for the consumption of capital, and “punishing” the one who does that.

Second, that would end the second problem, with property rights well defined, people would know what their real income is, and the amount of capital available to you, and if people decide to create and society, the amount of the total income designated to each of the participants would be well known, and their parcel of the capital stock, like in the modern corporations and companies.

The second way to solve this problem, is entrepreneur creativity. The creativity could solve the problem in the way of creating mechanisms to internalize, for example (not a perfect because it is for a positive externality) is the radio.

As we all know, radio signals are “free”, anyone with a radio could listen to the transmission without paying anything, hence creating the free rider problem. Then the radio operators started to worry about how they would sustain the radio network without any income. Their tried to use cable radios, and etc., but this didn’t work, then they tried to use the government to give subsidies to them, but before this proposal was accepted, someone invented a new way to win money, advertising. [1]

They started to advertise and help business to grow and consumers to know new products and low prices, and make a profit from it, creating the model that we know today in most of the media companies.

The same solution could happen and probably happend in the case of negative externalities, but I don’t know any case.

So to internalize the externalities we need better defined property rights, and more freedom to create and use new ideas.

[1] Example given by Jonh Lott in his book Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don’t.

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