One of the ideas I have emphasized throughout this book is the distinction between harm and wrong, which is usually ignored in discussions of economics in general and antitrust in particular. In most of these discussions, the mere existence of harm is sufficient to motivate a policy response—and not just motivate it, but justify it as well. Ironically, even though harm is a central focus of economic decision-making, it is not treated as an absolute wrong that must be eliminated—in fact, there is no concept of a moral wrong in economics or, as we’ve seen in antitrust, especially as considered by economists.

In this chapter we’ll explore this distinction in more depth. We start by examining a common example of its neglect in economics, the critique of which opens the door for important legal concepts, which themselves are controversial elements of the economic approach to law (also known as “law and economics”). Although this chapter does not address antitrust as directly as most, it does enlighten several of the discussions to this point while setting the stage for those to come in the rest of the book.

Externalities

Perhaps the most pernicious example in economics of the confusion between harm and wrong is the externality. As all students in introductory economics courses are taught, an externality occurs when a transaction between two parties affects someone who has no part in it. (For this reason, externalities are sometimes called third-party effects.) Externalities can be positive or negative: for example, homeowners who take good care of their property make the neighborhood more attractive and increase the value of their neighbor's property, and homeowners who do not take care of their property have the opposite effect.

Although it is a part of the standard definition used in economics, with its focus on the third-party effects of market activity, the existence of a commercial transaction is not essential to the identification of an externality. In general, an externality occurs whenever one person's actions inadvertently affect another person's interests (for better or for worse). The implication is that if the other person had been consulted, or if their interests had been considered, the external effects could have been managed better.

In terms of law and policy, negative externalities are obviously the greater concern, but there are costs to positive externalities too, specifically in terms of unrealized benefit.