That applies in spades to space. You see, cleaning up one piece of space junk does very little for helping the overall problem. The cost of cleaning it up is born by the organization that does it. The benefit is shared by all organizations in space. Thus even if the overall benefit makes cleanup worthwhile, cleanup is generally not worthwhile for whoever does it.

This is not always an insurmountable problem. For instance in many cases (eg environmental protection or maintaining fish stocks) governments have been able to solve the problem by creating artificial regulations that reduce externalities and create incentives that align the free market with the common good. Of course no country has the ability to impose such a solution on space.

A second common solution is what The Logic of Collective Action calls exploitation of the large by the small. In this situation a single actor, in the case of space probably the USA, gets sufficient benefit from acting in the common good that they will unilaterally do it. And, of course, once that organization does it, the others don't have to. US military policy is a fairly good example of this, as long as the USA is willing to patrol the world, international security is good enough that smaller countries, such as ones in Europe, do not bother to do the same. Nor do they contribute substantially to help the USA. (And, of course, they resent the USA for acting in ways that they don't like, and the USA resents them for not helping. This solution is a recipe for resentment.)

The third common solution is that a small group can find it worthwhile to cooperate. However the dynamics get very complicated - it is in the group's interest that the task actually be accomplished, but it is in every member's interest that they personally do as little as possible. A classic example of this is provided by OPEC, and the history of agreements within OPEC and their partial enforcement is a testament to how complicated the dynamics get.

In any case there is substantial economic theory on this exact problem. That theory says very clearly that near Earth space junk is a problem that markets are poor at solving. In addition the simple physics of of the situation make solving the problem very, very difficult. And nobody has come up with any good proposals for how to solve it.

My example may have been misleading. I don't say that a company should clean all of the space in LEO or any EO, for that matter. If a company is planning on putting up satellites in a given area, I suspect they would be willing to pay some other company to clean it first. This is no different (in theory) than getting a cleaning company to come shampoo the rugs before you move into an apartment.

This, of course, assumes that someone can go ahead and purchase an orbit and location on said orbit. I think that would make a lot of sense. Maybe a Verisign-like entity would take registration of expected orbits. You would be paying for the listing that you have claimed that orbit+location. If you deviate, you could be sued by the people whose orbit+location you violated. This entity would take an application and say "You can(not) have it." Nothing needs said about why or who else is there, thus preserving privacy.

If you wanted to wildcat, you'd be welcome to do so. But, if enough "legitimate" players used this registration system, then the courts would serve as a sufficient deterrent through civil suits. Particularly if the precedent was set that you could destroy anything that got into your orbit+location (so long as you cleaned up after yourself, of course, with precedent set for that, too).

I believe this avoids the tragedy of the commons. Comments?

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My criteria for good software:

1. Does it work?
2. Can someone else come in, make a change, and be reasonably certain no bugs were introduced?

How do you define an orbit for property purposes? Please keep in mind that there are many, many orbits that intersect. That there are important orbits that may have many things in them. (Geostationary orbit is the most notable example.) That orbital mechanics are chaotic, so any object placed in orbit will eventually wind up in a different orbit. (One can, if you time it right, get from near Earth orbit to the Moon with almost no usage of power. IIRC this trip takes about 2 years.)

Next, once you've defined orbits in a reasonable way, you have the problem that most of the space junk out there will cross many orbits. For each owner of an orbit, it is easier to just avoid stuff crossing your orbit than it is to clean that stuff up. (Don't forget, we still have no way to clean things up.) Also any attempt to clean up junk that is crossing one orbit is fairly likely to move it into someone else's orbit. What are the lawsuit opportunities there?

Even if you propose a solution to these problems, you have the bigger problem of how to agree on regulations that have to cover multiple countries. Do you really think that China or India is in any mood to accept a division imposed by the USA, Europe and Russia about who may use what parts of space? And what about the smaller powers? According to Wikipedia there are 45 countries with space agencies. Many, admittedly, do not launch their own satellites. But getting that many countries to agree on a complex legal system involving space is going to be very, very tricky.

I agree that these are problems that need to be addressed at some point if we're going to continue our exploration of space. However I submit that there are a lot of issues to be resolved that free markets are poorly equipped to address. And even if you come up with a solution where free market forces have a role, you first need to create the framework that free market can exist in. And that process itself can't be solved by waving the magic free market wand.