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Externalities in Economic Thought

On the Relevance of Wrongfulness to the Concept of Externalities

De la pertinence de l'illicéité face au concept d'externalités
Mark D. White
p. 313-329


Cet article examine le concept d'externalités en utilisant les concepts de droits et de justice corrective comme une alternative à l'utilitarisme et l'efficience. Plus précisément, les traitements standard des externalités dans l'économie du bien-être ne considèrent pas le rôle de l'illicéité dans les préjudices que les économistes et les décideurs politiques visent à optimiser. Je soutiens que si un préjudice est illicite, impliquant la violation d'un droit juridique valable, il doit pouvoir être traité par le système actuel du droit de la responsabilité, sans nécessairement impliquer des mécanismes politiques ou réglementaires. Si un préjudice n'est pas illicite, cependant, il devrait être considéré comme un effet accessoire et ordinaire d'interactions au sein d'un monde de rareté, qui ne justifie pas une intervention du gouvernement, en particulier si l'activité qui a conduit au préjudice non-illicite a impliqué un exercice des droits valides de l'offenseur.

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Texte intégral

1Externalities, understood to be incidental effects of an action or transaction on parties not involved with it, are usually taken to be of crucial importance in the economics of welfare, law, and policy. They are considered to be a type of market failure, a qualification to the claim that voluntary transactions improve individual and aggregate welfare, and an impediment to allocative and productive efficiency. Many economists have addressed the problem of externalities, most prominently Pigou with his system of optimal taxes and subsidies and Coase with his eponymous theorem.

2In this paper, I shall argue that this emphasis is largely misplaced. The modern economist’s emphasis on externalities is an artifact of the crude utilitarianism on which welfare and efficiency analysis are based. Viewed through the lens of corrective justice, however, externalities are of normative concern only when they involve violations of rights, in which case they can usually be addressed by the system of tort law, which is specialized for this purpose, rather than public policy or regulation, which can be invoked when the tort system proves inadequate for other reasons. If externalities do not involve rights violations, they are of no ethical concern, and indeed such misplaced focus becomes problematic when the activities that contribute to the externalities are protected by rights themselves. In such cases, externalities represent incidental harms that are inevitable in a world of social interaction amidst scarcity, and the optimization of these harms does not justify perfectionist utilitarian interventions that may themselves violate established rights.

1. Utilitarianism and Externalities

3The emphasis on welfare-maximization and efficiency in mainstream economics is a direct legacy of classical utilitarianism, which recommends that actions be taken that benefit the greater number of people to the greatest degree. That “benefit” takes different forms in different varieties of utilitarianism, from pleasure to well-being to desire fulfillment or preference satisfaction, but for our purposes we can use the general term “utility”; the specific form that utility takes is irrelevant at this level of discussion.

  • 1 See, for instance, Rawls (1982) and Sen and Williams (1982).
  • 2 See Nozick (1971, 41) for the initial description of utility monsters.
  • 3 See Dworkin (1977, 234-238).

4Admirably, utilitarianism reflects an egalitarianism element in that each person’s utility is equally weighted in the total, so the welfare of a prince counts for no more than that of a pauper. Nonetheless, there are a number of problems with this equality of consideration (besides the familiar criticisms of utilitarianism from dignity, as emphasized by Rawls and others).1 For instance, utilitarianism does not take into account each person’s unique capacity for experiencing or gaining utility; those who derive more utility (or disutility) from events, often known as “utility monsters,” will have more influence on aggregate utility than the even-tempered and will therefore receive more attention from policymakers.2 Also, persons who derive utility from the happiness of others end up giving more weight to these others’ utility, resulting in what Dworkin called double-counting.3

  • 4 See Harsanyi (1982) and Griffin (1986); for criticism of this approach, see Sugden (2008).

5The most problematic implication of utilitarian’s egalitarianism for the topic of externalities is the fact that each person’s utility counts the same regardless of its source or nature. The most obvious case and troublesome case of this is the positive utility that some people derive from the pain of others. This could include trivial pleasures such as schadenfreude; more disturbing satisfactions such as that experienced by a racist upon seeing minorities frustrated in their quest for civil rights; and most seriously, the thrill of a sadist inflicting pain on an unwilling subject. The converse of this is also problematic: one person’s disutility, displeasure, or emotional distress that arises from others’ attempts to increase their utility. These would include not only the opposite of the cases above—for instance, a racist being upset when the cause of civil rights is advanced—but also fairly common frustrations of ordinary life that involve no feelings of malice, but ones more accurately termed frustration. Economists (and philosophers) are sometimes willing to exclude such “illicit” sources of utility or welfare, such as when preferences are made “rational” or “ideal.”4 But when they do this, they impose value judgments that come from outside utilitarianism or, more commonly declare these sources of individual utility to come at the cost of aggregate utility (according to standard utilitarian logic), as with externalities.

  • 5 See note 27 below about nonreciprocal risk.

6Most relevant for present purposes are cases in which one person’s interests are set back by the otherwise legitimate activity of another. This might include anyone who loses in a competition (whether a softball game or a promotion at work), a homeowner whose property value declines when her neighbor paints his house an atrocious color, or the commuter who is made late for work due to heavy traffic. In each of these cases, the disutility may be real and significant, but each injury is the result of normal, everyday interaction with other persons, a universal situation in which harms ranging from the forgettable to the significant are bound to occur.5 But utilitarianism has no regard for the source of the changes in utility, much less in whom they manifest; its only concerns are that utility was lowered and that actions should be taken to ameliorate this.

  • 6 This is analogous to the neglect of the integral role played by the initial distribution of propert (...)

7All of this is unremarkable, mere curiosities of an introductory ethics course, until it becomes a matter of welfare economics and its impact on law and policy. In welfare economics, hypothetical government agents are charged with the responsibility of taking actions to increase or maximize welfare, understood to be the sum of individuals’ utilities (or indices of preference satisfaction). True to its utilitarian roots, this is to done with no regard for the source or substance of the utilities to be summed; as long as the intervention increases utility more than it lowers it, it is an ethical action (if not a required one). Specifically, rights are not taken into account on either side of the externality: neither in terms of a right to engage in the activity leading to the externality or a right that may be violated by said action.6

8Consider the three examples of negative externality suggested above. In the case of competition, the person who comes in second does not get the reward that goes to the person who comes in first. The runner-up was not entitled to the reward, but nonetheless suffered a setback proportionate to the degree to which victory was expected or anticipated. But this would likely not be an issue with economists with regard to efficiency. For one, the process itself may have been designed to elicit an efficient outcome, both through fostering effort as well as discovering the “best” person for the next stage of the competition. Also, assuming the winner was more “deserving” of victory, that person’s gains from winning the competition can be reasonably presumed to be greater than the runner-up’s losses, representing a gain in total utility over both the pre-competition status quo as well as the levels had the runner-up been declared the victor. In the end, this is an external harm that would not be regarded as a threat to efficiency, but rather a minor byproduct of its general pursuit.

9Next, we have the homeowner whose property value is adversely affected by her neighbor’s unattractive new house color. This case is often suggested to illustrate a relatively benign negative externality but is considered one nonetheless. This would not be of concern to welfare economists, however, since it affects only market value; it is a pecuniary externality that represents a loss to the homeowner and an equivalent dollar gain to a prospective buyer. As long as any sale that would have occurred at the original price still occurs at the lower price, efficiency is still achieved, albeit with a different distribution of gains. Even if the homeowner has no plans to sell, however, the offensive color of the house next door may be considered an eyesore, lowering the homeowner’s subjective utility and possibly attracting neighbors of similar aesthetic propensities to paint their houses in garish colors.

  • 7 For instance, see Verhoef et al. (2008).

10The final example, traffic congestion, represents the most relevant case of externality from the viewpoint of policymakers and one that is dealt with as such in theory as well as the real world through tolls, taxes, and fees, all under the rubric of “congestion pricing.”7 Turning to the standard economic approaches to optimizing externalities, the Coase Theorem is of no use here given the large numbers of anonymous parties involved, so the clear choice of policymaker is Pigouvian: increasing the price of driving during times of particularly heavy use, forcing drivers who remain on the road to internalize the external costs of their driving and providing incentives for those who can drive at different times to do so.

  • 8 Of course, the rights recognized in any legal system at any particular time are contingent of polit (...)
  • 9 Furthermore, competitions are generally judged by process rather than outcome, setting rules and aw (...)

11These three examples differ in terms of efficiency analysis but they are identical in terms of the rights involved.8 Interests were set back and harms occurred, but no rights were violated and the harmful activity was within the injurers’ rights. In the first example, the runner-up had no right to win the competition, and the winner had the right to compete to the best of his or her ability.9 In the second example, the homeowner has no right to a certain property value or to neighboring houses in a certain color range; more important, homeowners generally have the right to paint their houses as they choose (within broadly determined community standards). In the final example, the only one of the three to which serious attention is paid by policymakers, no driver has a right to get to where he or she is going in a certain amount of time, and additional drivers have the right to enter the road when they choose (within the existing traffic law). In each of these three cases, the “injurer” had every right to act as he or she did, and no legitimate right of the “victim” was violated—the harms were incidental to rightful action. In a world of scarcity and constant interaction, harms are ubiquitous. Most everything we do has some effect on other people, sometimes beneficial and other times harmful, and most of the time trivial.

  • 10 On wrongful harms, see Feinberg (1984, chap. 1). Feinberg also identifies a use of the word “harm” (...)

12From these examples, we can see the essential problem with the standard economic treatment of externalities: it takes no account of the distinction between a harm and a wrong, which comes down to a matter of rights rather than welfare or utility. Even insofar as the Coase Theorem presupposes clearly defined property rights, they play chiefly an instrumental role in promoting efficiency. But if we take rights to be intrinsically valuable, harms are not of moral or legal concern unless they violate specific rights—that is, unless they are wrongful harms, which can be handled by the existing system of tort law as well as by government policy and regulation.10

2. Corrective Justice, Rights, and Torts

  • 11 For a concise introduction to tort law, see Geistfeld (2008) or Goldberg and Zipursky (2010b).

13To see this distinction in theory and practice, we can look at tort law, the area of law that governs disputes between private parties based on injury (usually accidental) to persons or property. As it is often explained, tort law determines the conditions under which one person can shift his or her harm to the person who caused them. Statutes, case law, and legal principles relevant to torts define which harms can be the subject of suit, and the liability standard for each determines whether the injurer is liable for a specific tort under which conditions.11

  • 12 Holmes (1881). For recent statements of the economics of tort, see Shavell (1987), Kaplow and Shave (...)

14There are two general approaches to tort law. One is often traced back to Oliver Wendell Holmes and is now embodied in the economic analysis of law: tort law minimizes the total cost of accidents, chiefly harms from accidents and the cost of precaution.12 It does so by providing incentives to potential injurers to take the optimal or efficient level of precaution. Since efficiency is the goal of the economics of tort, neither the nature of the harm, the identities of the parties involved, nor the existence or amount of compensation, is relevant. Injured parties serve as mechanisms for discovery and enforcement that bring harms to light and give credibility to the threat of liability; the structure of liability then makes precaution efficient.

  • 13 For instance, see Weinrib (1995), Wright (1995), Coleman (2001), and Geistfeld (2001).
  • 14 On the failure of economics to appreciate the bilateralism inherent in torts, see Coleman (2001, Le (...)

15The other approach is based on corrective justice, a concept that can be traced back to Aristotle and is promoted by many modern legal scholars skeptical of the economic approach.13 Generally, the corrective justice approach emphasizes the wrong done by the injurer to the victim and aims to rectify, correct, or annul this illegitimate transfer of advantage. According to this view, the nature of the harm is the inciting factor, the identity of injurer and injured is of central concern, and compensation is the goal insofar as it helps correct the wrong done.14

16For our purposes, the most relevant aspect of tort according to corrective justice is the nature of a harm as a wrongful act as defined by the law, not simply an injury or setback to interests. In his discussion of corrective (or “rectificatory”) justice in the Nicomachean Ethics, Aristotle wrote that the law is concerned not with the social or moral status of the parties involved, but only with “the distinctive character of the injury, and treats the parties as equal, if one is in the wrong and the other is being wronged, and if one inflicted injury and the other has received it” (350 BCE, 1132). As Goldberg and Zipursky explain,

Tortious wrongdoing always involves an interference with one of a set of individual interests that are significant enough aspects of a person’s well being to warrant the imposition of a duty on others not to interfere with the interest in certain ways, notwithstanding the liberty restriction inherent in such a duty imposition. (2010a, 937)

  • 15 As Coleman writes, “I am not justly liable for all sorts of harms I cause you—those resulting, for (...)
  • 16 This recalls the point made in note 6.

17Coleman and Ripstein agree, explaining that mere causation is not sufficient to ground tort liability, which requires a moral or normative foundation, “an analytically prior account of what each of us owes one another,” that determines the appropriate balance of liberty interests of the injurer and security interests of the injured (1995, 96). Recall the example of the winner of a competition denying the runner-up victory; this was certainly an injury in terms of a setback of the runner-up’s interests, but it was not a wrong that demands to be corrected, nor did it represent a breach in any “duty” the winner owed to the runner-up.15 In general, as Geistfeld writes, “what one has lost for purposes of legal analysis depends on what one was legally entitled to in the first instance” (2014, 394), and the runner-up was not entitled to anything that he or she “lost” to the winner.16

18Naturally, wrongs can be defined in terms of the rights which are thereby violated; according to Feinberg, “one person wrongs another when his indefensible (unjustifiable and inexcusable) conduct violates the other’s right” (1984, 34). Coleman and Ripstein suggest rights as one example of a “normative conception of what we owe each other” (1995, 96) in that rights can specify the “borders” that are “crossed” to invoke liability. As they state this possibility (which they do not endorse, but for reasons that go beyond the present paper),

the costs of misfortune lie on those they happen to befall unless they result from the rights-invasive conduct of another. In such a view, it is not enough that the harm result from another’s agency. The harm must also consist in the invasion of a right. Such a view draws a boundary between the misfortunes that are an injurer’s bad luck to bear, and those that are to remain the victim’s responsibility (1995, 116).

  • 17 It is not necessary here to specify precisely what these rights consist of, only that rights matter (...)

19In line with Coleman and Ripstein’s emphasis on what people owe each other, Weinrib emphasizes the correlativity between rights and duties, writing that, with respect to negligence law, “for the defendant to be held liable, it is not enough that the defendant’s negligent act resulted in harm to the plaintiff. The harm has to be to an interest that has the status of a right, and the defendant’s action has to be wrongful with respect to that right” (2002, 352). For example, a person has a right not to have her property damaged or his body assaulted, and from these rights, the legal system derives correlative duties to observe them, which are then enforceable in civil court (as potential secondary duties to compensate). In other words, tort law provides parties with a means to seek compensation for wrongful harms, that is, harms resulting from a violation of their legal rights as defined by statutes and case law.17

  • 18 See, for instance, Posner (1981) and Kaplow and Shavell (2002, chap. 3).
  • 19 As Posner wrote, “there can be no assurance that a pure system of retaliation or revenge would resu (...)
  • 20 Coleman and Ripstein phrase this distincton in terms of subjective and objective valuation of costs (...)

20Unlike the economic approach, the corrective justice approach to tort does not stress the prevention of injury through incentives for precaution. This does occur as an unintended consequence, of course, but it is not the purpose of tort law (similar to how punishments designed to “fit the crime” rather than deter crime efficiently nonetheless deter to some extent). As such, the liability system and resulting damages from a corrective justice approach to tort may or may not be “efficient,” which is a concern of adherents to the economic approach.18 But this also relieves a tort system based on corrective justice system from having to proclaim that it claims to create an “efficient level of wrongs” (akin to the “efficient level of crime” sought by economists in that field).19 If harms are truly wrongful, then society does not want to achieve an optimal level of them; ideally it wants to eliminate them. Given that it cannot, however, it seeks to compensate for them and, as a secondary effect, to provide incentive to take precaution against them. No society can actually prevent all wrongs, but failing to do so should not be its express policy goal—a goal endorsed by the economic approach to its rhetorical detriment.20

  • 21 Of course, private bargaining may be available to the homeowner (assuming the preconditions for the (...)

21Reconsider now the other two examples of externalities we gave above. The homeowner whose neighbor lowers her property value by painting his house an atrocious color is certainly setting back her interests. He is not, however, violating any recognized right of hers, unless we were to grant her the right to either control his upkeep of his house or the right to a certain value of her home, both “positive rights” which would normally be considered to be in conflict with his more essential rights to keep his house as he chooses. The value of an asset is affected by many things, and an owner has no right to control any of them other than direct harms to the asset itself (including harm to reputation). Looking at it from the neighbor’s point of view, he would naturally have the right to paint his house the color of his choosing, unless that were prohibited by codes promulgated by the municipality or homeowners’ association (if his property is located within a planned community). In those case, his wrong would be against the authorities—and possibly good taste—but not his neighbor, who would still have no cause to sue in court for damages.21 In general, then, we can say that, as in the case of competition, the harm done to the first homeowner by the second is not wrongful.

22What about traffic congestion, the most serious of the three externalities in the sense that it is used to justify policy action? No one who has been stuck in rush hour traffic in a congested area can deny that drivers’ interests are set back. But at the same time, no driver acts wrongfully in trying to get to where he or she is going. Aside from traffic violations and accidents, no driver is violating any other driver’s rights because no driver has a right to get to his or her destination in a specific amount of time. Of course, there is an obvious commons problem is that a scarce resource (the highway) is being used inefficiently by individual drivers, each of whom has no incentive to curtail his or her own driving absent intervention from the state. But this itself is a utilitarian concept, and ignores the fact that no driver is acting wrongfully in the sense of violating any other driver’s rights. That the highway capacity is insufficient is unfortunate, but the solution is not necessarily to further burden the drivers who already put up with delays.

  • 22 See Geistfeld (2014, 402-405) for a similar analysis of reciprocal risk among drivers, and more gen (...)

23An argument could be made that, by paying congestion taxes, drivers are paying to enjoy less traffic and shorter commuting times, or benefitting from the information provided by the artificial “prices.” But this assumes particular interests on the part of drivers, as well as their price-elasticities, that are known by government planners; the pricing frame of congestion taxes may be more appropriate for private enterprise where such information is not relevant and prices play a more standard coordinating role. An alternative argument sees the rights of drivers as equally valid principles that conflict in the presence of scarce resources and therefore need to be balanced. Such a balancing procedure may resemble or even involve calculation of cost and benefits if the right themselves cannot determine a priority, which is consistent with a principled approach to conflicting rights.22 Indeed, the tort system itself makes use of comparisons of costs and benefits when determining liability and damages, but these calculations are in service of a more essential considerations of the rights involved and violated in a particular case.

  • 23 On the role of reciprocal harm in Coase’s work, see Epstein (1973), Posner, (1973), and Coleman (19 (...)

24I chose these three examples of externalities because they involve no violations of rights, but of course many other externalities do. For instance, Coase’s classic example of the passing train that throws sparks on a farmer’s crops would be interpreted by many as wrongful property damage based on negligent behavior. While Coase highlighted the reciprocal nature of the harm to point out that the situation can be resolved by either party changing its behavior, this does not deny that one party encroached on the rights of the other—rights that need to be verified for the Coase theorem to work at all.23 And when a case of external harm does involve a violation of rights, it is not a matter for Pigouvian intervention to make the harm efficient; it is more obviously the domain of tort law, in which the issue of rights will be adjudicated and damages awarded when appropriate. This is true under either interpretation of tort law, whether economic or justice-based; the only difference may be the choice of liability rule and amount of damages. But in either case, harm resulting from a violation of rights should not be treated as an externality to be optimized but a wrongful harm to be corrected or compensated when appropriate. As above, violations of rights should not be optimized intentionally but addressed as the wrongs they are, and failures to address and eliminate them completely should be anticipated but not planned.

  • 24 On the issues with causation in pollution torts, see Best and Collins (1982) and Dewees (1992).
  • 25 For further analysis of regulation based on entitlements (or rights), see Geistfeld (2014, 408-414)
  • 26 This likely accounts for much of the cognitive dissonance among economics students when first expos (...)

25There are cases, however, in which external harms are regarded as wrongful but the tort system cannot address them adequately. An important example is environmental pollution, which violates what Geistfeld identifies as an “underlying entitlement to physical security” (2014, 389). Often regarded as an issue of missing markets amid the absence of property rights over a common resource such as air or water, pollution can also be conceptualized as a tort in which polluters wrongfully cause harms to nearby persons. However, problems with identifying injurers and demonstrating proximate cause often make injury suits difficult for plaintiffs to win, rendering the tort system ineffective.24 In such cases, regulation and other policy interventions may be used (even in conjunction with the tort system) as long as they are motivated by rights violations, not the existence of harm per se with no regard to its wrongfulness.25 The latter approach, taken in welfare economics, results in regulators attempting to optimize pollution, implicitly treating it as an incidental harm rather than the wrong it is perceived to be by many (including the tort system).26 My general point is not that the tort system is sufficient to handle all cases of wrongful harm, but that only cases of wrongful harm should be addressed. While the tort system is the natural mechanism for dealing with such issues, it need not be the only one. The method chosen to address wrongful harms is less important than the condition that it only address wrongful harms.

  • 27 Fletcher (1972) uses the concept of nonreciprocal risk to formulate the function of tort: “to disti (...)
  • 28 This statement also reinforces the absurdity of intervention to optimize positive externalities by (...)

26Many cases of externality, however, involve no violation of rights and simply represent inefficiencies, incidental harms that a utilitarian would strive to make efficient. My thesis is that cases of external harm that involve no violation of rights are of no concern whatsoever from the point of view of welfare economics or policy. From the viewpoint of rights, the absence of any rights violations implies that the harm in these cases is unfortunate but incidental, an implication of the ordinary risks and overlap of interests that we bear every day.27 Only a utilitarian approach to policy can justify intervention into nonwrongful behavior for the purpose of reducing incidental harm from that behavior.28 A policy based on rights, on the other hand, would focus on protecting the rights of those behaving nonwrongfully, and if incidental harms are to be addressed, they should be addressed by other means (such as expanding access to the scarce resource in the example of traffic congestion).

3. The Role of the State in Rights and Harms

  • 29 The anti-maximizing view of the state is common to constitutional economics; see Buchanan (1990), R (...)

27A legal and political system that observed principles of corrective justice over welfarism would be significantly different from that imagined by mainstream economists. As opposed to the standard utilitarian government of welfare economics, an alternative theory of the state based on rights would maintain that the state exists to ensure the maximal degree of choice of individuals to pursue their own interests, consistent with all others doing the same (and correcting deviations from this ideal), while also providing certain social services when indicating through democratic processes. This can include the minimal state of libertarians and some conservatives, or the more active state of modern liberals (and some other conservatives), depending on the scale and scope of social services provided. The one thing this conception of the state does not encompass, however, is the direct intervention of the state in individual choices for the purpose of attaining efficiency or welfare-maximization.29

28Returning to the example of traffic congestion, all drivers on the road are there in pursuit of some objective or goal. Furthermore, with the exception of drivers new to the area, we can safely assume all drivers realize when traffic will be heavier and lighter. (Unexpected accidents and temporary road repairs occur, of course, but these would not be anticipated by authorities planning congestion taxes either.) Therefore, each driver heading out on rush hour is fully aware of the likelihood of traffic congestion and nonetheless chooses to drive at that time. In other words, the cost of driving at rush hour is already higher than at other times, and those who can avoid driving at rush hour already do. The remaining rush hour drivers accept the additional travel time (although they may be unhappy with it and may be forced by work or life schedules to drive at that time). Every driver at rush hour is aware of the longer travel time, and no rights are being violated by an additional driver entering the traffic flow.

29Furthermore, imposing congestion taxes makes rightful behavior more expensive for the sole purpose of advancing a collective ideal of efficiency in which no individual driver has an interest. In other words, each rush hour driver is effectively being penalized for his or her choice to drive at that time, even though none of them has done anything wrongful. Assuming every commuter has the right to drive where and when he or she chooses (within traffic laws regulating safety), a congestion tax is placing an undue burden on the exercise of that right in the interests of efficiency alone. As discussed above, an argument could be made that the road is a “gift” of the state and it are free to regulate the use of the road as it chooses—as the owner of a privately-owned road may do—but the question still remains whether this is an appropriate or just use of this power. Only if roadway regulation is motivated primarily by promoting the rights and interests of drivers, and designed to optimize those considerations, would it be consistent with the approach advocated in this paper.

30While the example of driving may not seem like a high-stakes example of rights-infringement, this principle can be generalized in the spirit of the position that, in some cases, rights must “trump” welfare (Dworkin, 1977). If individual rights are to have any weight or meaning whatsoever, they have to shield some aspects of a person’s behavior from intervention on the part of the state for the purpose of increasing welfare. As Coleman writes, “the very point of appealing to property rights is to establish that considerations of utility maximization… are inadequate to overcome certain claims” (1987, 459). This applies to cases in which individual choices may not maximize aggregate production, such as the effect of unhealthy lifestyles on work productivity and GDP, as is so often reported in the popular press; we normally recognize that these are private choices of employees who have no obligation to help maximize national output.

31More relevant example for present purposes would be cases in which the exercise of individuals’ right has a negative impact of the well-being of others but is nonetheless protected. Free speech is the most obvious and controversial case: the First Amendment protects the rights of a racist to preach hatred on the street corner, within certain limits, even at significant emotional cost to passersby. It is reasonable to imagine that, in some communities, the emotional distress caused by racists is much greater than the satisfaction enjoyed by them, but nonetheless, their speech rights are protected. Not only does everybody, racist or not, have the right of free speech, but they also have no obligation to ensure that their speech acts contribute to aggregate welfare.

  • 30 On this issue, see Schwartz and Goodin (1998).

32In a liberal society, citizens normally have certain legal rights, not only of free speech, but also of free thought, association, and movement, none of which are required to increase or maximize welfare directly; they often do, if only in the sense that private utility contributes to aggregate utility, but not by obligation. Not only may individuals’ acts not have a maximizing effect of welfare, they may involve incidental harms to other people which are not in themselves wrongful, such as exposing others to ideas that disgust them—or setting their commutes back marginally. But this is wholly within citizens’ basic rights, which are not considered to be subject to requirements of welfare maximization.30

  • 31 This is similar to the distinction drawn by Calabresi and Melamed (1972) between property rules, wh (...)

33Of course, Pigouvian taxes or fees do not violate individuals’ rights in the sense of prohibiting the taxed activity. Even wrongful harms addressed by tort law are not prohibited in the sense that criminal acts are.31 But while the state does not prohibit acts that cause nonwrongful harm to others, they do change the costs of those acts with no justification based on justice or rights. Furthermore, they may have negative effects in terms of other types of justice. For instance, while such policy interventions serve no purpose as far as protecting rights or enforcing corrective justice, they do have implications for distributive justice, especially in light of the state being the beneficiary of any tax revenues, some of which will come from people who have no reasonable alternative to driving at higher-cost times. There may also be concerns regarding the socio-economic distribution of the extra costs if their incidence falls more on lower-income segments of the population with fewer options for tax avoidance. When examined in terms of general justice, standard policymaking responses to nonwrongful externalities are not only difficult to justify, but they also raise significant questions which cast these policies further into doubt.

4. Conclusion

34When economists and policymakers look at externalities merely in terms of negative effects on utility, they miss out on the richer normative implications of the harms themselves. Harms do not simply happen; they are caused, often by other persons, and sometimes wrongfully at that. In such cases, the economists’ typical approach of optimizing that harm ignores the wrongfulness inherent in the injury, wrongfulness that deserves to be acknowledged and corrected when possible, which is the traditionally understood purpose or function of tort law. If that function of tort law is impaired, as in the case of pollution, then alternative policy options can be used, but always based on wrongful harm (that is, resulting from rights violations) rather than harm per se. On the other hand, when harm is not wrongfully caused but is incidental to rightful activity, there is often no need for discretionary public policy intervention at all, lest that rightful activity be discouraged. In general, this paper recommends a shift in focus from property rights to tort rights to emphasize the crucial role of rights in an extended understanding of externalities.

I thank the editors and two anonymous referees for their insightful and provocative comments.

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1 See, for instance, Rawls (1982) and Sen and Williams (1982).

2 See Nozick (1971, 41) for the initial description of utility monsters.

3 See Dworkin (1977, 234-238).

4 See Harsanyi (1982) and Griffin (1986); for criticism of this approach, see Sugden (2008).

5 See note 27 below about nonreciprocal risk.

6 This is analogous to the neglect of the integral role played by the initial distribution of property rights in utilitarian calculation or cost-benefit analysis, as shown most dramatically by the Scitovsky paradox (Scitovsky, 1941) and emphasized more recently by work in behavioral economics concerning the endowment effect (Thaler, 1980). (I thank an anonymous referee for stressing this point.) In this case, the initial endowment of rights has an impact on the resulting utilities themselves, whereas I focus on the role of rights in determining when utilities should be relevant at all.

7 For instance, see Verhoef et al. (2008).

8 Of course, the rights recognized in any legal system at any particular time are contingent of politics, history, and culture, and cannot be assumed to be just; it would be begging the question to imply otherwise. My point is merely that traditional welfare economics and the analysis of externalities derived from it pay no attention to rights whatsoever. (I thank an anonymous referee for emphasizing this point.) On this point, see also note 17.

9 Furthermore, competitions are generally judged by process rather than outcome, setting rules and awarding the prize to the person who best performs within those rules.

10 On wrongful harms, see Feinberg (1984, chap. 1). Feinberg also identifies a use of the word “harm” that implies wrongfulness: “To say that A has harmed B in this sense is to say much the same thing as that A has wronged B, or treated him unjustly” (1984, 34). In this paper, however, I will use the term harm simpliciter to refer to an injury, setback to interests, or disutility, and the term “wrongful harm” when appropriate.

11 For a concise introduction to tort law, see Geistfeld (2008) or Goldberg and Zipursky (2010b).

12 Holmes (1881). For recent statements of the economics of tort, see Shavell (1987), Kaplow and Shavell (2002, chap. 3), and Posner (2011, chap. 6).

13 For instance, see Weinrib (1995), Wright (1995), Coleman (2001), and Geistfeld (2001).

14 On the failure of economics to appreciate the bilateralism inherent in torts, see Coleman (2001, Lecture 2).

15 As Coleman writes, “I am not justly liable for all sorts of harms I cause you—those resulting, for example, from fair competition” (1987, 453). In general, Goldberg and Zipursky write: “In part out of a sense of the limitations as to what sorts of interferences and injuries are justiciable, and in part for policy considerations that have changed over time with changes in social norms and economic and political circumstances, courts and legislatures have never sought to render interferences with all such interests actionable. (There is no tort for interference with one’s ability to obtain a good education or a decently well-paying job.)” (2010a, 937)

16 This recalls the point made in note 6.

17 It is not necessary here to specify precisely what these rights consist of, only that rights matter in terms of identifying wrongful harms. Most scholars agree that there is no unifying principle for which wrongs qualify as torts; Goldberg and Zipursky refer to this as “The Hodgepodge Problem,” and respond that while tortious wrongs are a diverse set, “the wrongs recognized by tort law hardly make for an eccentric or random collection” (2010a, 937); see also Goldberg and Zipursky (2010b, chap. 3) and Stevens (2007). In fact, Coleman (2001, 34) explicitly “reject[s] the suggestion that an adequate account of tort practices requires that there be a general theory from which we can derive them all systematically.”

18 See, for instance, Posner (1981) and Kaplow and Shavell (2002, chap. 3).

19 As Posner wrote, “there can be no assurance that a pure system of retaliation or revenge would result in the imposition of optimal penalties. But this is not to say that there would be too much crime. There might rather be too little” (1980, 82).

20 Coleman and Ripstein phrase this distincton in terms of subjective and objective valuation of costs. Leaving judgments of efficient precaution and liability to potential injurers renders the estimation of costs subjective and imposes these judgments on victims, whereas a rights-based framework asks the potential injurer to consider whether he or she is “being appropriately careful in light of my neighbor’s interests in security and mine in liberty” (1995, 114-115), an objective assessment based on rights and duties that takes both parties’ interests into account (but not as determined solely by the injurer).

21 Of course, private bargaining may be available to the homeowner (assuming the preconditions for the Coase Theorem hold): if the color bothers the sensitive homeowner enough, she may be able to pay the other homeowner to keep his house within an acceptable chromatic range. If not, we might imagine the other homeowner values the freedom of color more—in either case, he is presumed to have the right over which bargaining may or may not proceed.

22 See Geistfeld (2014, 402-405) for a similar analysis of reciprocal risk among drivers, and more generally White (2011; 2015) on balancing deontological principles using consequentialist reasoning.

23 On the role of reciprocal harm in Coase’s work, see Epstein (1973), Posner, (1973), and Coleman (1980), and Page (1986).

24 On the issues with causation in pollution torts, see Best and Collins (1982) and Dewees (1992).

25 For further analysis of regulation based on entitlements (or rights), see Geistfeld (2014, 408-414).

26 This likely accounts for much of the cognitive dissonance among economics students when first exposed to the idea of optimizing pollution. (Just imagine what they think when they hear that there can be “too little crime.”)

27 Fletcher (1972) uses the concept of nonreciprocal risk to formulate the function of tort: “to distinguish between those risks that represent a violation of individual interests and those that are the background risks that must be borne as part of group living” (543).

28 This statement also reinforces the absurdity of intervention to optimize positive externalities by subsidies the behavior that contributes to them.

29 The anti-maximizing view of the state is common to constitutional economics; see Buchanan (1990), Roth (1999), Vanberg (2005), and White (2014).

30 On this issue, see Schwartz and Goodin (1998).

31 This is similar to the distinction drawn by Calabresi and Melamed (1972) between property rules, which allow interference only with ex ante permission, and liability rules, which allow interference with ex post compensation.

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Mark D. White

Department of Philosophy, College of Staten Island/CUNY,

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