I think you [Peter G. Stillman] are thinking in terms of the common misintepretation of Coase. Coase's main point was not that all is well when transaction costs are low. Coase's point was that the notion of zero or neglible transaction costs is utterly unrealistic. The best institutions, to COase, are the ones that result in the lowest possible costs to effecting welfare enhancing exchanges. Transaction costs are always significant, so externalities always exist and social costs diverge from private costs. But this alone proves nothing. THe costs of effecting worthwhile exchanges (or transfers) through government mean that government policies will also deviate from first best optimality. So the relevant choice is not between nearly perfect markets (with negligible transaction costs, among other things) and government as we know it. Nor is it between imperfect markets and a nirvana of perfect government, run by benevolent omniscient dictators. The real choice is between private and public sector institutions, none of which can ever come close to delivering first best pareto optimality. So one lesson from Coase is not to be naive about any institution delivering perfection, and not to hold any institution to the absurd standard of first best competitive equilibrium. Another lesson from Coase (and Hayek) is that real errors exist, and we never find ourselves in the best of all possible worlds. I have heard some economists talk about the stuff I wrote about in the first paragraph, and then conclude that we always end up with the second best institutions. Coase denied this explicitly. I would not characterize COase as an equilibrium theorist. Coase saw institutions as changing through time, for better or worse. Coase also disparaged mainstream 'blackboard economics'. I have a few problems with Coase, but the points you raise derive from widely held misconceptions of Coase's work, in my opinion. Doug Mackenzie