The concept of public domain order comes to light when individuals or organizations engage in collective actions to govern the utilization of shared resources in situations where property rights are ambiguous. Webster and Lai suggest that the problems with public goods mirror the problems with externalities: poorly defined property rights, imperfect information, and high transaction costs. Given that the problems with public goods and externalities are essentially the same, in this chapter, public goods are analyzed using concepts germane to discussions about externalities.

Externalities and public goods are conventionally viewed as a problem of market failure because the market oversupplies goods that yield third party costs and undersupplies or fails to supply goods that yield third party benefits. However, as Webster and Lai point out, the market failure approach only goes so far. Our authors rely on the Coase Theorem to explain the inadequacies of market failure, concluding that when information is incomplete, the externality and public goods problems will depend on the distribution of property rights.

According to this property rights perspective, the problems of externalities and public goods are the result of undeveloped markets and underdeveloped institutions that do not clearly define property rights. The absence of property rights causes public goods and externalities to remain unpriced and inefficiently allocated.

Webster and Lai claim that government intervention is neither necessary nor justified in many cases. Public domain resources are constantly shifting through an evolutionary and iterative process of individuals creating ways to remove the ambiguity of property rights. According to the authors, an urban management agenda defined narrowly by a set of deviations from some agreed ideal is bound to cause as many new externalities as it alleviates.

Exclusion is the mechanism - and result - of assigning property rights to a public good. The boundaries of the public domain are constantly shifting because property rights are a function of the resources value and the transaction cost of excluding others. Once property rights are assigned to a resource, markets will spontaneously re-order these rights and render previously unmarketable goods marketable by introducing exclusionary mechanisms. The way in which benefits and transaction costs of the public domain resources are distributed will determine the structure of the institutions that are best suited to handle that particular public resource problem.