Negative externalities distort the market mechanism. Wouldn't passing entries for them in books of accounts be a possible solution?
Well, I have proposed a question on a similar subject, in this platform (). Negative externalities, in a book of account, I believe it would not be possible, exactly because they are out of individual cost of enterprise. Perhaps if we could bring the measures to internalize them into the output of book of account we could, then, accept what is proposed into your question. That is what it seems to me.
Mr. Sud you have asked an important question. Negative externalities cannot be brought under the Accounting system of any firm because you need prices to value them and we know with externalities competitive prices donot reflect Pareto Optimal values of commodities so the accounting prices if they are market prices will be second or third best. However, that is not to say that in Economies with negative or positive externalities to firms and consumers, Financial Prices using say the CAPM will not work or that financial markets will not be efficient at least in principle. They will be , however, if financial markets in their turn are incomplete then there will be problems of financial asset pricing for new assets which are introduced in the market. Please see my paper on Imperfect Asset Markets on www.researchgate.net/profile/Soumitra_Mallick. If financial investors do not care about externalities beyond what the firms have already taken into account then markets can be at Arrow-Debreu equilibrium and efficient on the basis of information that investors have.
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