Media Coverage, Market Power and Internalization of External Cost: A study of four Swedish industries

Abstract: A negative externality arises when an actor has a negative impact on another actor, and when this cost is not regulated inside the price system of the economy. A negative externality discussed in the literature is emissions from industry production affecting the environment and human health. One way to make polluters pay and achieve market efficiency is to induce a tax that is equal to the damage they inflict on society. This is referred to as internalizing external costs. In order to calculate how much of the external costs that are covered by emission tax a measure called ‘degree of internalization’ can be used. The aim of this thesis is to analyze the impact of media coverage on the degree of internalization, through government and stakeholder pressure, in four Swedish industries. The focus will be on emissions of carbon dioxide. Starting out with a time series analysis we find that it takes at least two years for media coverage to impact the degree of internalization. By conducting panel data analysis we conclude that media coverage primarily affects the degree of internalization by reducing industry emissions. We also find that market concentration is positively related to industry emissions, which indicates that more competitive industries have greater incentives to reduce emissions.