How do externalities, such as pollution and resource depletion, pose challenges for market-based approaches to environmental conservation? Furthermore, what policy instruments can governments employ to internalize externalities and promote sustainable development?

Externalities are costs or benefits that affect parties not directly involved in an economic transaction, leading to market failures and suboptimal resource allocation. Policy instruments such as Pigovian taxes, cap-and-trade systems, and subsidies for green technologies aim to internalize externalities, incentivize sustainable practices, and correct market distortions to achieve environmental and economic goals simultaneously.