Private market activities create so-called externalities. An example of a negative externality is air pollution. It occurs when a producer does not bear all the costs of an activity in which he or she engages. Since external costs do not enter into the calculations producers make, they will make few attempts to limit or eliminate pollution and other forms of environmental degradation.

Negative externalities are a type of market defect all economists believe is appropriate to try to correct. Milton Friedman refers to such externalities as "neighborhood effects," (although it must be kept in mind that some forms of pollution have an all but local effect). The classic neighborhood effect is pollution. The premise of a free market is that when two people voluntarily make a deal, they both benefit. If society gives everyone the right to make deals, society as a whole will benefit. It...