The Coase Theorem is valuable for highlighting the role of property rights, but the policy implications need care. Government 'solutions' to externalities often create worse problems than they solve. Regulatory agencies become captured by special interests, environmental regulations impose massive costs with dubious benefits, and taxation schemes redistribute wealth under the guise of efficiency. The libertarian solution is to strictly enforce property rights—if a factory pollutes your property, you have a right to an injunction and damages. This tort-based approach is more just and more efficient than regulatory bureaucracies.

Alchian's discussion of externalities and the Coase Theorem is intellectually interesting, but it may give a misleading impression that optimal solutions can be calculated and implemented. In reality, knowledge problems plague both market and political solutions to externalities. We don't know the optimal level of pollution or the correct Pigovian tax rate because this information is dispersed and subjective. Market processes, even with transaction costs, tend to discover workable solutions over time. Government interventions, by contrast, impose solutions based on inadequate knowledge, and these solutions are resistant to revision when they prove faulty.

Alchian presents my theorem accurately, though the emphasis should be on its practical limitations. The theorem shows that with zero transaction costs, efficient outcomes emerge from bargaining regardless of initial rights assignments. But transaction costs are never zero, and they're often quite high, especially when many parties are involved. When transaction costs are high, the legal assignment of property rights does matter for efficiency. Courts and legislatures should assign rights in ways that minimize transaction costs and facilitate bargaining. This is a more nuanced approach than simply mandating regulations or taxes.

The public goods argument for government intervention is vastly overstated. First, very few goods are truly non-excludable—technological innovations constantly create new ways to exclude non-payers. Second, even for goods like national defense, voluntary provision is possible through insurance companies, mutual defense associations, or other market mechanisms. Third, government provision suffers from its own fatal flaws: how do we know how much defense to provide? Voters can't express their preferences through voluntary payment, so political provision inevitably means either too much or too little. The 'market failure' of free-riding is trivial compared to the government failure of political decision-making.

Alchian is right to be cautious about the public goods argument, but the issue goes deeper. The question isn't just whether markets or government provide public goods more efficiently—it's whether we can know what the optimal provision is. Markets reveal preferences through voluntary payment, but if a good is truly non-excludable, preferences aren't revealed this way. Government can force payment through taxation, but then we don't know if people value the good enough to justify its cost. There's no calculation mechanism for true public goods, which is why they remain a theoretical problem without a satisfactory solution.

The public goods argument assumes that once we identify non-excludability, government provision follows necessarily. But this overlooks institutional creativity. Lighthouses, the classic textbook example, were historically provided privately in England through creative arrangements linking lighthouse fees to port charges. Similarly, broadcasting finances itself through advertising rather than direct viewer payment. The question should be: what institutional arrangements can solve the exclusion problem? Sometimes it's government provision, sometimes private solutions, sometimes hybrid arrangements. Transaction costs and institutional details matter more than abstract categories.

The market solutions Alchian describes—warranties, reputation, brand names—are exactly right. Markets handle information asymmetries far better than government regulation. Consumer protection laws, licensing requirements, and safety regulations supposedly address information problems, but they actually restrict competition, raise costs, and protect established firms from innovative challengers. Moreover, government interventions assume that bureaucrats know better than consumers what information matters and how much safety is worth. This paternalism is both inefficient and unjust. Free markets, with their incentives for reputation and repeat dealing, generate better information than political processes.

Alchian's discussion of information asymmetries is useful, but it should connect more clearly to the fundamental knowledge problem in economics. Information asymmetry is just one aspect of dispersed knowledge. The deeper point is that knowledge is inherently decentralized, local, and tacit. Market institutions evolve to economize on knowledge—brands signal quality, intermediaries specialize in evaluation, reputation systems aggregate dispersed information about trustworthiness. Government interventions that attempt to solve information problems typically founder on even greater knowledge problems: regulators don't know what information consumers need or how to provide it cost-effectively.

Information asymmetries are genuine transaction costs that affect market organization. When information costs are high, we see institutional responses: vertical integration (firms produce inputs internally to avoid quality uncertainty), long-term contracts (to build trust and reputation), and intermediaries (who specialize in information production). The question is: which institutional arrangement minimizes the total costs of production and transaction? Sometimes it's spot markets with extensive signaling, sometimes it's unified ownership, sometimes it's regulation. The choice depends on the specific nature of the information problem and the relative costs of different solutions.