Howard and Bernadette are bothered by their neighbor’s (Andy) new flood lights, which appears to look out over their backyard and right into the hot tub they have built. Andy doesn’t see the problem because his flood lights are in his backyard and provide him some sense of security, but they are a nuisance to Howard and Bernadette.
Instead of talking to their neighbors directly, like the Coase Theory would suggest, they head to the city zoning office to try and report the issue in the hopes that he has violated some city zoning ordinance. When they realize that will take too much time, they try to get Sheldon’s help, but Sheldon is cautious because Bernadette and Howard didn’t get permission to build their backyard deck, nor renovate their shower.
In Howard and Bernadette’s mind, government regulation should only be used for externalities. Their deck and bathroom aren’t affecting third parties so they don’t see the need to have them approved.