> On the topic of market transactions with externalities, you might find the Coase theorem interesting, and the related folk theorems in game theory. I see it as a compelling rebuttal to the Pigovian model of using a centralized organization (generally government) to internalize social costs.
One can envision idealized democratic government as a mechanism for realizing the required precondition for the Coase theorem, to wit, the democratic process of policy making in such a system is the venue in which externalities are traded. (That such exchanges occur in the policy making process in any government of human beings is widely observed, the "ideal democratic" part is that that all citizens have equal power in the policy making process, such that the trade is generalized.)
This, of course, unifies the Coase theorem with the Pigovian model (the separation between the two comes from treating "government" as something distinct from the participants in the economy, rather than a venue in which those participants interact.)
One can envision idealized democratic government as a mechanism for realizing the required precondition for the Coase theorem, to wit, the democratic process of policy making in such a system is the venue in which externalities are traded. (That such exchanges occur in the policy making process in any government of human beings is widely observed, the "ideal democratic" part is that that all citizens have equal power in the policy making process, such that the trade is generalized.)
This, of course, unifies the Coase theorem with the Pigovian model (the separation between the two comes from treating "government" as something distinct from the participants in the economy, rather than a venue in which those participants interact.)