The statement says “if transaction costs are zero, the market produces the efficient outcome”, but what is most interesting is the equivalent contrapositive “if the market didn’t produce the efficient outcome, it was because of transaction costs”.
I would add that the problem is not only transaction costs but also irrationality. You will not get the efficient outcome if the transaction costs are sufficiently low but the agents are not rational enough to think of the transaction or to consent to it. Also, some transaction costs can be worked around, so the problem is irreducible transaction costs and irrationality.
I would also add that I think the conclusion applies to other coordination problems, market failures, and games in general, not just externalities. Many aggregation mechanisms can always produce the efficient outcome in most or all such problems if transaction costs are low enough and the agents rational enough. The market mechanism is not the only one; if you allow all agents to self-modify and prove to other agents that they did so, that should also be able to solve these problems if transaction costs are low and agents rational enough.
But no mechanism will always be able to produce an efficient outcome even with high transaction costs or bounded rationality. For example, I think we can conceive of games in which producing an efficient outcome requires logical omniscience and a halting oracle (we might design a game in which producing an efficient outcome requires knowing the googolplexth Mersenne prime). Such a game might be solved by the market mechanism only if the agents were as rational as AIXIs.
The statement says “if transaction costs are zero, the market produces the efficient outcome”, but what is most interesting is the equivalent contrapositive “if the market didn’t produce the efficient outcome, it was because of transaction costs”.
I would add that the problem is not only transaction costs but also irrationality. You will not get the efficient outcome if the transaction costs are sufficiently low but the agents are not rational enough to think of the transaction or to consent to it. Also, some transaction costs can be worked around, so the problem is irreducible transaction costs and irrationality.
I would also add that I think the conclusion applies to other coordination problems, market failures, and games in general, not just externalities. Many aggregation mechanisms can always produce the efficient outcome in most or all such problems if transaction costs are low enough and the agents rational enough. The market mechanism is not the only one; if you allow all agents to self-modify and prove to other agents that they did so, that should also be able to solve these problems if transaction costs are low and agents rational enough.
But no mechanism will always be able to produce an efficient outcome even with high transaction costs or bounded rationality. For example, I think we can conceive of games in which producing an efficient outcome requires logical omniscience and a halting oracle (we might design a game in which producing an efficient outcome requires knowing the googolplexth Mersenne prime). Such a game might be solved by the market mechanism only if the agents were as rational as AIXIs.