Perhaps this is a bit of an over-simplification but...
When it boils down to it, any financial/work/product transaction is less efficient with a third party controlling a larger percentage of the transaction. Rand's concept, is really that the government is the third party, and in that fashion, is controlling a larger percentage of all transactions making the whole game less efficient.
Are party to party transactions always efficient? Not in all cases, but they are generally more efficient than third party involvement.
A more micro example of this analogy is the healthcare/health insurance industry. Third party coverage in general has simply driven prices up and has held economic progress in healthcare up. The government is third party, the insurance companies are third party. To put it simply, the government is the middleman; the less middlemen, the more efficiency. The insurance companies' most efficient modis operadi for the whole would be pooling resources and risks in a small population for low probability, high cost calamities, and letting the freemarkey justify other smaller costs.