ABSTRACT Ken Hanly's recent article in this Journal (Vol. 9, No. 1, 1992) takes issue with Ronald Coase's approach to resolving problems of externalities, as set forth in his classic paper ‘The Problem of Social Cost’. I argue that Hanly's discussion of Coase misinterprets or inappropriately rejects certain aspects of Coase's analysis, specifically, with regard to the reciprocal nature of externalities and the economic role of government. The resolution of externality problems is presented as an issue of selective normative choice as to whose interests are to count; neither efficiency nor morality claims are uniquely dispositive of the issue. Copyright © 1994, Wiley Blackwell. All rights reserved