There are a number of factors that are important in the internal vs external memory debate. I guess two of them are of greater importance to determine what's best for you.

*Moving applications*

A lot of Android applications allow transfer to external memory like an SD Card but there are also a number of applications that don't. Depending on it's size, the internal memory (also known as primary storage) will fill up with those applications that can't be moved to the external memory. 
By having a large internal memory you can avoid the problem of not being able to install more application because of memory shortage.  

If you have a rooted phone though you can move these application to an partition on the SD Card. With the use S2E (search in Google Play store) you can move applications to that particalar partition.
If you do something like this, make sure you get a nice fast microSD card though. 

Also remember that the Android system itself is installed on the internal memory causing the free space to shrink even more. 

*Caching*

Applications use caches to store data. These caches reside on you internal memory and so it becomes even more crowded. Here, the same statement applies. Bigger internal memory is lesser problems with memory shortage. 

*Why is more internal memory expensive?*

Most of the applications you use on your phone run faster on the internal memory than on the external memory. To keep it simple; your internal memory is faster in processing data than the external SD Card. I guess more data processing speed/power is more expensive.

I think someone with greater knowledge on this area could provide you with more information