Webster and Lai explain that three distinct forms of order emerge in markets as individuals seek to lower the costs of cooperation. This chapter explores these three categories of order: organizational, institutional, and proprietary.

Organizational order emerges as individuals combine voluntary property rights to reduce the costs of cooperating in the market. Firms and voluntary organizations (e.g. cooperatives, homeowners associations, collectives, clubs, charities and non-profit associations) are held together by an implicit or explicit contract; indeed, the authors describe a city as a nexus of contracts. Without organization, the costs of searching for information about other transaction partners would be excessive.

Firms may be considered to be organizations that deliver private goods, while clubs are organizations that deliver public goods. Neighborhoods - made up of residential, industrial, and commercial clusters - also behave like firms. Municipal government can also be seen as a type of club because it provides regulations and delivers collectively-consumed infrastructure with taxes collected from its citizens, firms, and visitors. On a more abstract level, a community can also be an example of a club, as it delivers collectively-consumed benefits, such as a sense of belonging, security, and culture.

Institutional order emerges from interactions between these different organizations, as they create rules and agreements to reduce certain transaction costs. Three types of rules are considered significant: spontaneous rules; rules organized by private contract; and rules organized by the state. Our authors further classify six categories of institutions, ranging from more to less spontaneous:

1. Conventions: Practices accepted by others, which would harm self-interest if ignored.
    
2. Internalized Rules: Behavior governed by personal ethics.
    
3. Customs: Time-honored practices that can help establish informal arrangements.
    
4. Informal Agreements: Unwritten, accepted standards of private groups.
    
5. Formalized Private Codes: Formally-established rules of private groups.
    
6. Public Codes: Rules established by the state, backed by the force of law.

Through institutional rule-making, distinct patterns of exclusive property rights emerge. These rights adapt to become more sophisticated over time as competition intensifies. Spatially, these property rights take the form of boundaries that impact the value and allocation of the resources that they enclose. Changing resource value, in turn, causes the formation of institutions that allocate the rights over these resources in the most efficient way.

As noted in Chapter 1, resources that remain in the public domain give rise to the bulk of problems that governments seek to address. At a certain point, the benefits derived from a common resource will completely dissipate as more individuals use it. Meanwhile, the overall costs to impose and enforce property rights overtake the total benefits that the resource produces.