Hayek and externalities

From The Road to Serfdom:

There are... undoubted fields where no legal arrangements car create the main condition on which the usefulness of the system of competition and private property depends: namely, that the owner benefits from all the useful services rendered by his property and suffers all the damages caused to others by its use. Where, for example, it is impractical to make the enjoyment of certain services dependent on the payment of a price, competition will not produce the services; and the price system becomes similarly ineffective when the damage caused to others by certain uses of the property cannot be effectively charged to the owner of that property. In all these instances there is a divergence between the items which enter in private calculation and those which affect social welfare.; and whenever this divergence becomes important some method other than competition may have to be found to supply the services in question. Thus neither the provision of signposts on the roads, nor, in most circumstances, that of the roads themselves, can be paid for by every individual user. Nor can certain harmful effects of deforestation, or of some methods of farming, or of the smoke and noise of factories, be confined to the owner of the property in question or to those who are willing to submit to the damage for an agreed compensation. In such instances we must find some substitute for the regulation by the price mechanism.