Any federal system will have to live with frictional losses and transaction costs, on account of the difficulty of deciding out what belongs to which state and who can tax or regulate what to whom. We decide to bear those costs because they are outweighed, or so we hope, by the benefits of competition (relative to a fully nationalized system). There remains the task of figuring out and enforcing rules that will minimize the friction and make competition thrive. We are lousy at that—not because the right rules are terribly complicated, but because they would do what they’re supposed to do: discipline government at all levels.
Yesterdays’ Wall Street Journal has two pieces that illustrate the point: an article on state lawsuits over the marketing of pharmaceutical drugs, and another on Senate action on internet sales taxes. There’s also an op-ed by eBay CEO John Donahoe on the subject.