As the two travelers make their way toward Dictionopolis, the watchdog apologizes for his gruff behavior and explains that people expect watchdogs to be ferocious. He introduces himself as Tock and launches into a speech about the value of time and the importance of the watchdog's role in preserving it as he and Milo approach the gates of Dictionopolis.
Once inside, Milo and Tock discover that it is market day in the city, and the square is filled with merchants selling all sorts of words and letters. They meet the five royal advisors, who have the curious habit of repeating each other in synonyms and randomly defining some of the words each other use. The advisors explain the function of the word market in a dizzyingly complicated fashion, leaving poor Milo as lost as when he first entered the city. "I never knew words could be so confusing," he tells Tock. "Only when you use a lot to say a little," the watchdog replies.
Milo and Tock explore the word market, looking over shelves full of everyday words and fancy-sounding words (which are so expensive Milo cannot afford even one) and jars filled only with letters. Milo samples an A and finds that it tastes "sweet and delicious—just the way you'd expect an A to taste."
As Milo and the shopkeeper talk about the construction of words, the buzzing of a giant bee surprises them. The Spelling Bee tells them not to be alarmed and then spells the word "alarmed" for them. The insect claims that he can spell almost any word and proves it by taking challenges. When Milo expresses his amazement at this skill, another insect, this one looking more like a beetle, trots over and pronounces it "BALDERDASH!"
Dodging swings of the grumpy beetle's cane, the Spelling Bee introduces him as the Humbug, "a very dislikeable fellow." The two giant insects begin an argument and things go from bad to worse when the Spelling Bee knocks the Humbug's hat off his head and the Humbug begins swinging wildly with his cane, knocking one stall into another and causing the whole marketplace to collapse like dominoes.
When the dust from the Humbug's disastrous clumsiness settles, the merchants begin hollering in mixed-up nonsense because all of their words have become jumbled. Eventually, they right the stalls and sweep up the spilled words, finishing up just as Officer Shrift arrives on the scene. Milo is surprised by how short the policeman is, noticing that he is twice as wide as he is tall.
Officer Shrift begins his investigation by declaring everyone present to be guilty and then begins asking very confusing questions that seem to have nothing to do with the collapse of the marketplace. Officer Shrift finds Milo guilty of various ridiculous crimes and, pronounces a sentence of six million years in prison then escorts Milo and Tock to a dank and musty dungeon. He warns them about "the witch" in the prison then shuts the three into a cell.
Inside Milo meets the "Which," Faintly Macabre. She explains that she is King Azaz's great aunt and was once in charge of choosing which words would be used for which occasions. As time went on, she noticed how frightfully wasteful people were with their words, often using too many for the simplest statements. So she began to give people fewer and fewer words to use, eventually becoming so miserly that nobody could speak or write at all. King Azaz became infuriated and locked the Which in the prison.
Faintly Macabre tells Milo that only the return of Rhyme and Reason will free her. When Milo seems confused, she settles down to tell him the story of Rhyme and Reason.
In this section, Juster begins to orient us in the Lands Beyond and sets up some plot motifs and themes that will frequently reappear throughout the book. Dictionopolis gives the reader the first taste of the "civilized" parts of the Land Beyond; later, Milo travels to lands outside of the city that are quite wild. In Dictionopolis, as in the rest of the Lands Beyond, Milo finds that what he usually cannot touch or taste (like words or reasons) are physical objects. He slowly begins to understand this idea after his interlude with the gatekeeper and wanderings in the word market. This plot motif, in which Milo discovers some unusual aspect of the Lands Beyond and figures it out with the help of the people he meets along the way, is a common occurrence in The Phantom Tollbooth .
This motif relates to the theme of education, a major part of Juster's book. As he wanders the word market, Milo becomes increasingly aware of how many words there are and how few he knows. He is also very impressed by the Spelling Bee, who is able to spell practically every word there is. Milo's lack of education in this subject eventually gets him into quite a bit of trouble when Officer Shrift begins asking him questions that he cannot understand. Once in prison, Milo realizes how valuable an education in reading and writing can be and vows to learn more about words.
Another important theme that first appears in this section is one that will soon become the focal point of Milo's travels: Rhyme and Reason. One aspect of the Lands Beyond is that there is an element of nonsense to it. The Whether Man, in Chapter 1, acts very strangely, running around babbling and never answering any questions. Similarly, Officer Shrift conducts his investigation and trial of Milo and Tock in a ridiculous fashion and sentences them to an unbelievable six million years in prison. Faintly Macabre, the Which, also tells a story in which she behaved unreasonably, becoming a miser with words.
All of this foolish behavior, especially the Which's, can be linked to the disappearance of Rhyme and Reason from the land. Juster frequently returns to this theme as Milo encounters a number of nonsensical characters throughout the book. The author's message is that of simple common sense: each of these characters has lost his or her understanding of the obviously right thing to do.
It is also significant that Milo begins his friendship with Tock, the watchdog, in this chapter, as it represents an important turning point for Milo. Though Milo certainly has a lot to learn, his biggest problem was his boredom and laziness. Tock saved him from that in the Doldrums by getting him to use his imagination, and the fact that he continues to accompany Milo suggests that Milo has conquered this problem altogether. In the rest of the book, Milo will deal with a number of his shortcomings, but never again will he appear to be the dull little boy he was in Chapter 1. His immediate friendship with Tock suggests that he has the watchdog to thank for it.