Externalities must be internalized through legal mechanisms from "summary" of Economic Analysis of Law by Richard A. Posner
Externalities are a common occurrence in economic transactions. When a person engages in an activity that affects others outside of the transaction, externalities are said to exist. These externalities can be positive or negative, depending on whether they benefit or harm third parties. The existence of externalities creates a problem because the parties involved in the transaction do not take into account the costs or benefits that accrue to others. To address this problem, externalities must be internalized through legal mechanisms. Internalizing externalities means that the parties involved in the transaction must bear the costs or receive the benefits of their actions on third parties. Legal mechanisms such as tort law, regulation, or market-based incentives can be used to internalize externalities. Tort law is one way in which externalities can be internalized. When a person's actions cause harm to others, tort law allows the injured party to sue for damages. By holding individuals accountable for the harm they cause, tort law internalizes the costs of externalit...
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