[rayiner]

Free markets are not the same as the state of nature. A basic assumption is that if you want a benefit from someone, or you want someone to shoulder a burden in a way that benefits you, have you to transact with that person.

Say you run a delivery business, and your bike messengers can save a lot of time (netting you a higher profit) cutting across your neighbor's property. It's a free market when you can freely transact with your neighbor for an easement over his property; it's not a free market when the government fails to stop you from trespassing on his property without his permission.

Externalized costs from pollution aren't any different. Like trespassing, pollution burdens other peoples' property. Letting people pollute unchecked undermines the free market.