In Chapter 2, the authors describe urbanization as a process of knowledge diversification and deepening interdependence. Webster and Lai refer to knowledge spillover and urban exchange as "catallaxis; in a catallitic economy, it is essential to have constrained competition, which is necessary to foster voluntary exchange and capital accumulation. Competition also has the effect of distributing costs between suppliers and consumers.

In this light, private property rights are important to the enrichment of individuals and the wider society. The assignment of property rights leads to spontaneous effects in the way individuals cooperate with one another. The effects can be far-reaching, especially in cities, where knowledge specialization and spatial ordering is finely balanced. Removal of property rights can have an opposing effect, resulting in a reduction in the scope and depth of voluntary cooperation and a curtailment of mutually beneficial exchanges.

The costs in an urban private property rights system may be described as exclusion costs, transaction costs, and organization costs. Exclusion costs include surveying and physically demarcating resources, or establishing and enforcing agreements concerning those resources. Transaction costs include the cost of searching for exchange or combination partners, making and policing multi-party contracts, and handling third party interests. Organization costs include gathering centralized information, making rules, and enforcing rules; effectively, the cost of coordinating exchange through organizations and planning.

With these costs in mind, the authors justify nine criticisms of markets.

1. Weak consumers/producers may justify trade protectionism and subsidies, such as affordable housing.
2. Immoral trade may justify laws prohibiting slavery or the trafficking of babies.
3. Non-tradable goods may justify laws prohibiting the sale of antiquities or human body parts.
4. Inalienable goods may justify laws curtailing the markets for freedoms and the necessities of life.
5. Retaliation/self-defense may justify laws that enforce fair competition between firms.
6. Externalities may justify zoning.
7. Monopolies may justify anti-trust laws.
8. Public goods may justify government control of national defense.
9. Future generations and sustainability concerns may justify regulations preventing the immediate use of natural resources.

Webster and Lai argue that these arguments against unrestricted markets can be problematic because of two reasons: (i) the modification of market participant behavior from a position of power requires too much effort and (ii) normative issues can be viewed from a relativistic point of view what is morally right for one person may not be conceived the same way for others.

Without ignoring its shortfalls, this chapter champions the success of the market in supporting cities. The authors suggest that effective public policy should allocate property rights to individuals and cities should be managed to allow markets to function as freely as possible.