[OrwellianChild]

I think you and pi guy are on the same wavelength, but emphasizing different pieces... He is saying that pure capitalism doesn't work well against common goods (e.g. capitalism in fishing leads to over-fishing). He further says to privatize or regulate (via government intervention). This is the same as "internalizing the externalities" as you described.

In other words, don't blame capitalism (a natural set of incentives aligned around gain from profit) for the disruption of the fish supply in the small town. Blame the Mexican (per the parable) government for not either licensing the fishing rights to a single charter or regulating the amount of fishing in the area. Properly managed, either approach would incentivize business to reign in the take-all (free capitalism) approach for long-term sustainability (and thus, greater overall profit).