Well, if Coasian bargaining fails, and you can't afford to litigate, maybe you can get better results calling your congressman.  Or...maybe not!

James Buchanan won the Nobel Prize in economics in 1986 for his applications of economic theory to explain the behavior of politicians and political interest groups.  Public choice theorists view politics as an economic activity.  Politicians are just as self-interested as businessmen and consumers.  In a simple public choice model, the elected official maximizes his likelihood of reelection subject to legal constraints on how he can extort campaign contributions from special interest groups.  Similarly, William Niskanen models the government bureaucrat as maximizing her agency's size and budget.

Government has always been an arena for "rent-seeking" by special interest groups.  For example, as we discussed during the first week of class, US sugar quotas benefit a small group of US sugar beet farmers at the expense of US consumers, foreign sugar cane industries, US foreign policy interests, and even US drug interdiction efforts (Columbians produce export cocaine because the US won't buy sugar from them.)   Although the economic wastefulness of this policy is obvious, 250 million "rationally ignorant" consumers are no match for a few dozen well-organized sugar lobbyists in Washington.  It simply isn't worthwhile, or even possible, for ordinary citizens to track and oppose every piece of special-interest legislation that gets proposed.  Even a $100 million taxpayer rip-off is only 40 cents per American, barely enough to cover the cost of the stamp on a lcomplaint etter to your Congressman.

Government creates business regulations not so much to protect consumers, but to protect businesses from competition.  Classical microeconomic producer theory assumes low barriers to entry or exit in competitive industries.  Industries with high entry/exit barriers tend to be less competitive, and thus less efficient.  So government policy ought to minimize these barriers, but it doesn't.  In fact, government typically creates unnecessary barriers!

Consider the case of cosmetologists and nail technicians in Delaware.  I have nothing against these professions, but if any profession should have low barriers to entry or exit, these should.  Suppose you are a 16-year-old girl who hates high school and knows a lot about makeup and nail polish.  You would like to drop out of school and  might lobby for a professional certification system to "protect the public from incorrect use of cosmetics." Certification is automatic for the established cosmeticians, of course; others might be required to spend two years training on farm animals.  The certification simply impedes new entrants to the profession.

Businesses really enjoy regulations when they are able to capture the agencies that do the regulating.  In some cases, they establish "revolving doors" through which politically connected individuals pass back and forth between industry jobs and cushy government regulator jobs.  You can always try softening up a regulator by promising him an even nicer job in your company when he's ready to leave public service.

Government basically runs on a dual currency system of votes and money, and the relative influence of money appears to be increasing. Over the past few decades voter turnouts have fallen while money contributions to politicians have risen dramatically, so campaign expenditures per vote have skyrocketed.  Your vote is worth a lot of money to some people.

Unfortunately, voter turnouts vary significantly by income and age category, with wealthier and older people having the highest turnouts.  Not surprisingly, politicians mostly cater to these constituencies.  This is why our government takes Social Security taxes from working poor famiilies and gives them to retired millionaires.

Some public choice economists such as Mancur Olsen are deeply pessimistic about the future of democracy, given the inevitable susceptibility of politicians to special interests.  As a nation's political institutions are slowly overwhelmed with rent-seeking leeches, economic growth stagnates.  As special tax breaks erode the tax base, governments may become increasingly dependent on borrowing and run up the national debt.  Buchanan views deficit spending as taxation without representation: we are taxing future generations to pay for our own lousy politics.  It may take an outright revolution to break the special interests' stranglehold.

Recent history seems to contradict some public choice views: the US seems to have cured itself of its deficit spending addiction, and public interest in campaign finance reform is fairly strong.
 

In conclusion, many externality problems persist because the cost of obtaining a legal or political remedy is often more costly than the problem itself.