But you have neighbors downstream who will object to your contaminants polluting their use of the water. Externalities can be efficiently resolved by applying the Coase theorem.[1] Another common objection is that there are certain public services that can only be provided by the state, but we often find in practice that self-interested parties can develop a business model that addresses those needs.[2]
> In this 1960 paper, Coase argued that real-world transaction costs are rarely low enough to allow for efficient bargaining and hence the theorem is almost always inapplicable to economic reality. Since then, others have demonstrated the importance of the perfect information assumption and shown using game theory that inefficient outcomes are to be expected when this assumption is not met.
Not so reassuring.
Let's think about a plausible scenario: I run an industrial facility and am secretly dumping industrial waste into the river. My neighbors start getting sick. When they analyze their drinking water, it shows the presence of a bunch of chemicals whose most probable source is my industrial facility. My neighbors realize I'm to blame, and complain to me about dumping chemicals into the water. I say I've got no idea what they're about and those chemicals must be from somewhere else. Obviously I refuse to hand over any records from my facility.
Getting nowhere, my neighbors file a lawsuit. Then we go through a years-long series of lawsuits where I deny any wrongdoing and maybe eventually have to pay some money, although it hardly brings back everyone killed by illnesses my facility caused.
[1] https://en.wikipedia.org/wiki/Coase_theorem [2] http://www.independent.org/publications/article.asp?id=757