I agree with PBurns that central planning does not necessarily solve external effect inefficiencies. What is required is for normal procedures to correctly signal social costs and benefits. Trying to correct after the fact is both intellectually and politically daunting -- as in, it won't happen so don't expect it, anymore in market socialism than capitalism. Mike Albert and I tried to take this issue seriously in our review of the literature on incentive compatible mechanisms in Quiet Revolution in Welfare Economics but more importantly in the design and incentives inherent in the participatory planning system we proposed. We argued the key was to make it as easy to express social as private preferences or demands, including desires for pollution reduction and environmental benefits. And to do this in a way in which there are not perverse incentives to misrepre- sent actual preferences. We set up the planning process so that collectives affected by what are external effects in market systems would register their preferences for social goods or environmental benefits without any reason to exaggerate or underestimate their true desires all as part of the same process in which individual groups of workers and consumers registered their desires. This is why we believe that the indicative prices that result from our socially nested system of participatory planning will far more accurately incorrporate all the effects that are ignored and external to market based desision making. I can't spell it out in more detail in an email. Chapter 5 in The Political Economy of Participatory Economics, Princeton 1991 does though.
