In The Machinery of Freedom, p. 132, Friedman writes,
Imagine buying cars the way we buy governments. Ten thousand people would get together and agree to vote, each for the car he preferred. Whichever car won, each of the ten thousand would have to buy it. It would not pay any of us to make any serious effort to find out which car is best; whatever I decide, my car is being picked for me by the other members of the group. Under such institutions, the quality of cars would quickly decline.
I think this paragraph is quite profound. It gets to an important issue: if competitive government (or anarcho-capitalism, as Friedman termed it) would be so much better, then why don't we observe it? One view is that "they" are out to get us, "they" being the evil politicians running the state. Instead, it is the institution of democracy that is to blame. Majority voting is bound to lead to bad outcomes.
This suggests to me that we ought to try to get competitive government on the ballot, where it only has to win once. In states that allow Constitutional initiatives, try proposals that allow for other entities to compete with government on a level playing field. Charter schools, for example. Or state constitutional amendments that make it easy for people to break off from large jurisdictions and instead form charter communities.
These initiatives might be defeated. However, if you get lucky and pass one, then it may get a chance to work. Going back to Munger's Puzzle, which is how the government of Santiago, Chile, could get away with a public bus system that is worth than its private predecessor, I wonder what might happen if the people of Santiago could take a yes-or-no vote concerning whether to allow private competition. My guess is that a direct vote would stand a better chance than hoping that people will elect pro-market politicians.