Vacation islands for Some believe that government should correct negative externalities by regulating or taxing the activity causing the pollution in order to 686 public reduce production to the socially efficient level, while others favor having government assign property rights and then letting free markets determine an optimal outcome. Either way, most agree that markets fail in some way when it comes to environmental protection, so some type of action by government is needed. The theory of externalities can also be applied to situations in which benefits spill over to others. This theory is used to justify government involvement in areas such as education, public transportation, public health, police and fire protection, and supporting the arts. In theory, we could rely completely on free markets to provide, for example, fire protection. In free market equilibrium, consumers could purchase private fire protection until the marginal private benefits equal the marginal costs. This free market equilibrium would be inefficiently low, however, if the social benefits exceed the private benefits. Vacation islands 2016.