Tim Lee, who is rapidly proving himself one of the most unconventional (and hence interesting) libertarian bloggers, writes about markets, firms, and governments:
The central insight of [Yochai Benkler's paper] Coase's Penguin was that peer production is a form of economic organization on par with the market (first explained by Adam Smith) and the firm (first explained by Ronald Coase). Benkler expands on this tripartite classification of organizational structures in The Wealth of Networks. He spends quite a lot of time pointing out that non-market, non-firm methods of social organization account for a substantial fraction of our economic lives. We carpool, have dinner parties, give directions to strangers, help each other move, etc. These activities generate goods and services (meals, rides to work, information) that could also have been obtained via the market, but for a variety of reasons we sometimes find that non-market organizational methods meet our needs better.
I think this is a point that libertarians tend to under-appreciate. . . .
The whole post is worth reading (some decent comments too), but I want to focus on one particular part:
Progressives often think the state can convert market forms of organization into non-market, non-firm, social organization. But they're wrong. When the state gets involved, it almost always imposes a centralized, bureaucratic structure--a "firm" form of organization, in Benkler's parlance. A lot of progressive may laud the potential of public schools to create communities, but in practice, the public school system is every bit as soulless and alienating as the largest corporations. Folks on the left should hate the New York public school bureaucracy for all the same reasons they hate Wal-Mart.
This is true to a first approximation. However, I think it lumps too many kinds of "firm" together. For example, the National Science Foundation's formally a government agency, and it operates like a hierarchical "firm" in the sense that you can pull out an organizational chart and say Alice reports to Bob, who reports to Carol, who reports to Dave, etc. In another sense, however, the NSF is more highly decentralized than almost any "firm" operating in the actual market: essentially all of the NSF's "product" (i.e., scientific research) gets outsourced to universities, and a large fraction of that goes directly to individual researchers . Even the job of choosing which research grants get funded is outsourced: grant proposals are reviewed for funding by committees of independent scientists.
So is the NSF truly a "firm"? Is it a "market"? A "commons"? It's hard to say. If you want to break it down, you might call it a firm (the NSF agency bureaucracy) that uses a commons/reputation economy (grant committees) to allocate resources to individual entrepeneurs (professors) who work within quasi-feudal federations (universities) of guild chapters (academic departments). Yet the NSF and its partners constitute one of the most successful forms of social organization ever devised: considered together NSF, DARPA, and the NIH may be responsible for catalyzing more basic scientific research results than any other institutions in human history. 
Although it may be useful to use the tools of management theory, economics, or political science to analyze the workings of this confederacy of institutions, it would be misleading to label it a market, a firm, or a commons.
More generally, although it's possible (with some intellectual contortion) to divide the economy into the "public" and "private" sectors, the institutions in each sector take radically different forms that depend on a myriad of forces (including social norms and "architecture", the other two modalities of regulation in Lessig's four-cornered graph). It could be argued that the public/private distinction often isn't the most useful discriminator when thinking about whether some form of social organization is better or worse for any particular purpose.
I would therefore characterize the progressive tendency to seek solutions in government intervention as simply a reflection of their willingness to seek solutions to problems, period. Is the market not serving a need? Maybe we should see if the government can do it. Maybe we should see if the formalized nonprofit sector can do it. Maybe we should see if peer production can do it. Maybe we should start a business. Progressives probably err on the side of too much hope for all of these, but the median libertarian seems to err on the side of dismissing all but the last as either futile, pointless, or simply immoral.
(Aside from all of the above, of course, a whole other justification for government action arises from the fact that coercive state action can sometimes solve collective action problems. But I'd rather not get into that today.)
 Who are, of course, then "taxed" by the university bureaucracy for overhead.
 Granted, these institutions have had more resources than any other scientific organizations in history, but I think we got our money's worth.
Adam Thierer asks why child molesters get out of jail with such short sentences. As others have noted before, the criminal justice system sets sentences based on the available capcity of prisons. According to Bureau of Justice statistics, 21% of our current prison population consists of drug offenders --- not drug-related violent crimes, which would drive this number way up, but drug trafficking, possession, etc. --- and that's trending upwards over time.
The "War" on "Drugs" wastes enormous resources that could, among other things, be used to protect children from sex criminals. Unfortunately, this kind of point's pretty tough to get across in political debate, and I can already hear in my head the shallow sound-bite rejoinder: "We don't have to choose between protecting our children from drugs and protecting them from sexual predators. We can do both:" ---pause for applause--- "we can build more prisons."
Of course, barring some revolution in incarceration policies, any more prisons that get built will be populated by roughly the same proportion of drug (and drug-related crimes) offenders, making prison-building a fantastically inefficient way to provision for improved incarceration of sex offenders. But now we're entering the territory of points too subtle to make effectively in, say, the paltry thirty seconds that were allocated for rejoinders in our last Presidential "debates". The American people might understand it, but the news media would caricature you as a wooden, uncharismatic policy wonk (if you said it calmly) or a ranting nut case (if you said it with passion). The exchange itself would last less than five minutes, but the columnists and talking heads would be repeating their talking-points caricature of it for weeks.