IN an idealized setting for the operation of markets, it becomes artificial and redundant to interpret the production-trade process itself as involving the internalization of potentially relevant externalities. Nonetheless, it may be useful to think of the ordinary operation of the market in these terms when we want to move beyond the economists' idealized construction to settings where "externalities," defined in the orthodox sense, may exist. In such settings, trade becomes only one among several institutional arrangements for "internalizing externalities." In this paper, we suggest that for the particular types of economic interaction consequent upon the inauguration of entrepreneurial ventures the internalization embodied in a well-functioning legal structure may be superior to either trade or overt political arrangements. Our purpose is to compare alternative means of "internalizing" potential externalities in terms of the effects on the activity of entrepreneurs, and, through such activity, on the pace of economic development. Consider the two-party example made familiar by R. H. Coase in his now-classic paper on social cost.' At an elementary level of analysis, the interaction between the cattle rancher and the wheat farmer is not different from that between any two ordinary traders; indeed, this point was the fundamental one in Coase's argument. To the extent that the "externality" is Pareto-relevant, exchange will tend to take place, hence "internalizing" the effect and guaranteeing an efficient outcome.2 Although much of his discussion was posed in terms of "liability for damages," the implicit model for Coase's analysis is one that assumes all property rights