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When Jack and Jill Make a Deal*

  • Daniel M. Hausman


In ordinary circumstances, human actions have a myriad of unintended and often unforeseen consequences for the lives of other people. Problems of pollution are serious examples, but spillovers and side effects are the rule, not the exception. Who knows what consequences this essay may have?

This essay is concerned with the problems of justice created by spillovers. After characterizing such spillovers more precisely and relating the concept to the economist's notion of an externality, I shall then consider the moral conclusions concerning spillovers that issue from a natural rights perspective and from the perspective of welfare economics supplemented with theories of distributive justice. I shall argue that these perspectives go badly awry in taking spillovers to be the exception rather than the rule in human interactions.

I. Externalities

Economists have discussed spillovers under the heading of “externalities.” To say this is not very helpful, since there is so much disagreement concerning both the definition and significance of externalities.



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1 Kenneth Arrow, “The Organization of Economic Activity: Issues Pertinent to the Choice of Market versus Nonmarket Allocation,” Collected Papers, vol. 2, General Equilibrium (Cambridge: Harvard University Press, 1983), p. 133.

2 Demsetz, Harold, “Toward a Theory of Property Rights,” American Economic Review, vol. 57 (1967), pp. 347–59.

3 Steven, Lin, ed., Theory and Measurement of Economic Externalities (New York: Academic Press, 1976); Bergstrom, T., “The Use of Markets to Control Pollution,” Recherches Economique de Louvain (1973); Buchanan, James and Stubblebine, C., “Externality,” Economica, New Series, vol. 29 (1962), pp. 371–84; Cheung, S., “Transaction Costs, Risk Aversion and the Choice of Contractual Arrangements,” Journal of Law and Economics, vol. 12 (1969), pp. 2342; Coase, Ronald, “The Problem of Social Cost,” Journal of Law and Economics, vol. 3 (1960), pp. 144; Demsetz, Harold, “The Exchange and Enforcement of Property Rights,” Journal of Law and Economics, vol. 7 (1964), rpt. in ed. Tyler, Cowen, The Theory of Market Failure: A Critical Examination (Fairfax: George Mason University Press, 1988), pp. 127–45, and “Some Aspects of Property Rights,” Journal of Law and Economics, vol. 9 (1966), pp. 61–70; Freeman, A., Haveman, Robert, and Kneese, A., The Economics of Environmental Policy (New York: Wiley, 1973); Mishan, Ezra, “Reflections on Recent Developments in the Concept of External Effects,” Canadian Journal of Political Economy, vol. 31 (1965), pp. 334; Starrett, David, “Fundamental Nonconvexities in the Theory of Externalities,” Journal of Economic Theory, vol. 4 (1972), pp. 180–99.

4 Kenneth Arrow, “The Organization of Economic Activity,” pp. 133–55.

5 For example, Coleman, Jules, “Efficiency, Auction and Exchange,” Markets, Morals and the Law (Cambridge: Cambridge University Press, 1988), pp. 6794.

6 Fried, Charles, “Difficulties in the Economic Analysis of Rights,” eds. Gerald, Dworkin, B., Gordon, and Peter, Brown, Markets and Morals (New York: Wiley, 1977), p. 192, equates externalities with “unintended impositions incidental to the pursuit of some other end.” See also the quotations in the appendix from Lin and Coleman.

7 Robert, Nozick, Anarchy, State and Utopia (New York: Basic Books, 1974), p. 151.

8 Nozick sometimes suggests that all voluntary transfers of what one is entitled to are just, as when he asks the rhetorical question (with respect to his famous Wilt Chamberlain example), “By what process could such a [voluntary] transfer among two persons give rise to a legitimate claim of distributive justice on a portion of what was transferred, by a third party who had no claim of justice on any holding of the others before the transfer?” (ibid., pp. 161–62). But, as Nozick hints in a footnote and makes explicit later, voluntary transfers can run afoul of the Lockean proviso. The Lockean proviso would, for example, forbid transactions that permit someone to acquire rights to all drinking water (ibid., p. 179). But Nozick readily forgets his own qualification. In considering the thought experiment of individuals selling rights to control various of their activities, he writes, “Since this very extensive domination of some persons by others arises by a series of legitimate steps, via voluntary exchanges, from an initial situation that is not unjust, it itself is not unjust” (ibid., p. 283). One should also note that Nozick believes that “the free operation of a market system will not actually run afoul of the Lockean proviso” (ibid., p. 182).

9 See Thomas Scanlon, “Liberty, Contract, and Contribution,” in Dworkin et al., Markets and Morals, p. 44.

10 Anarchy, State and Utopia, p. 163.

11 Ibid., pp. 28ff.

12 Such leaks are actionable at law, and if the owners of the perhaps defunct gas station are solvent, alive, and locatable, then our system of tort law may provide proper compensation. But the point remains either that actions involving no force or fraud can violate (or can risk violating) rights or that spillovers will typically involve a pervasive “force and fraud.”

13 Railton, Peter, “Locke, Stock and Peril: Natural Property Rights, Pollution and Risk,” ed. Mary, Gibson, To Breathe Freely (Totowa: Rowman and Allenheld, 1985), pp. 89123. Railton also raises serious difficulties concerning risks that I shall not discuss. Thomson, Judith in “Some Ruminations on Rights,” ed. Jeffrey, Paul, Reading Nozick: Essays on Anarchy, State and Utopia (Totowa: Rowman and Littlefield, 1981), pp. 130–47, raises serious questions about whether Nozick can really be committed to such an implausibly stringent view of rights (see esp. pp. 136–38).

14 I would fully endorse Railton's conclusion:

if we take seriously the fact that we find ourselves situated in and connected through an environment, we are soon impressed with the inaptness of a conception of morality that pictures individuals as set apart by propertylike boundaries, having their effect upon one another largely through intentional action, limiting their intercourse by choice, and free to act as they please within their boundaries, although absolutely constrained by them (“Locke, Stock and Peril,” p. 119).

15 Sterba, James, “Abortion and Euthanasia: Basic Concepts,” ed. James, Sterba, Morality in Practice (2nd ed.; Belmont: Wadsworth Publishing, 1988), p. 135. See also Anscombe, Elizabeth, “War and Murder” and “Mr. Truman's Degree” in her Ethics, Religion and Politics (Minneapolis: University of Minnesota Press, 1981), pp. 5171; Anscombe, Elizabeth, “Medalist's Address: Action, Intention, and ‘Double Effect’,” Proceedings of the American Catholic Philosophic Association, vol. 56 (1982), pp. 1225; Boyle, Joseph Jr, “Toward an Understanding of the Principle of Double Effect in Ethics,” Ethics, vol. 90 (1980), pp. 527–37; and Quinn, Warren, “Actions, Intentions, and Consequences: The Doctrine of Double Effect,” Philosophy and Public Affairs, vol. 18 (1989), pp. 334–51.

16 I regard it as an ad hoc maneuver designed to reconcile the conviction that there are absolute moral prohibitions on actions such as killing people with the fact that, depending on the circumstances, all of these supposedly prohibited actions may be morally permissible after all. For the most plausible recent defense, see Warren Quinn, “Actions, Intentions, and Consequences.” Here I am stretching the doctrine of double effect, which is designed to permit one to violate absolute prohibitions in exceptional circumstances when some great harm might be avoided or some great good achieved. So it may be that a deontological rights theorist would reject this way of answering the objection that a deontological rights theory is too restrictive. But these are problems for deontological rights theorists such as Nozick, not for me.

17 The doctrine of double effect might help to make sense of Nozick's puzzling remarks concerning risk and compensation in ch. 4 of Anarchy, State and Utopia (see Eric Mack, “Nozick on Unproductivity: The Unintended Consequences,” in Reading Nozick, pp. 169–90). Consider also the following brief discussion of pollution, which seems inconsistent with Nozick's insistence that rights are side constraints:

Since it would exclude too much to forbid all polluting activities, how might a society (socialist or capitalist) decide which polluting activities to forbid and which to permit? Presumably, it should permit those polluting activities whose benefits are greater than their costs, including within their costs their polluting effects…. A society must have some way to determine whether the benefits do outweigh the costs. Secondly, it must decide how the costs are to be allocated. It can let them fall where they happen to fall: in our example, on the local homeowners [harmed by airport noise]. Or it can try to spread the cost throughout the society. Or it can place it on those who benefit from the activity: in our example, airports, airlines, and ultimately the air passenger. The last, if feasible, seems fairest (Anarchy, State and Utopia, pp. 79–80).

That property rights are inviolable seems to have been forgotten. Indeed it is not clear whether rights have any special weight here at all. One would have thought that if homeowners have a right to quiet and to the airspace over their homes, then an airport could be operated only with the unanimous consent of (and consequently full compensation to) the homeowners whose airspace is violated and whose quiet is disturbed. Notice that airspace violations are a means to the end of air travel, not a side effect, and cannot be defended via the doctrine of double effect.

18 Or as protections against various practical threats to moral agency or autonomy. Such grounds of practicality may or may not be available to a natural rights theorist such as Nozick. I am here influenced by the excellent discussion of the basis of rights in Griffin, James, Well-Being: Its Meaning, Measurement and Moral Importance (Oxford: Oxford University Press, 1986), ch. 11. See also Charles Fried, “Difficulties in the Economic Analysis of Rights.”

19 See Christman, John, “Can Ownership be Justified by Natural Rights?”, Philosophy and Public Affairs, vol. 15 (1986), pp. 156–77, who emphasizes the importance for Locke of the consent involved in the use of money in enlarging property rights.

20 Yet Nozick does allow that considerations of welfare may have a role in determining “otherwise arbitrary features” of “a statute” (Anarchy, State and Utopia, p. 153n); at one point he writes, “Perhaps the precise contour of the bundle of property rights is shaped by considerations about how externalities may be most efficiently internalized…” (Anarchy, State and Utopia, p. 280).

21 In his notorious essay, “The Problem of Social Cost,” Coase was, among other things, concerned to show that responsibility for an externality is always shared and that the positions of the parties are fully symmetrical. Thus Dahlman, Carl in “The Problem of Externality,” Journal of Law and Economics, vol. 22 (1979), pp. 141–62; rpt. in The Theory of Market Failure, pp. 209–34, for example, writes, “Perhaps the real significance of the court cases cited by Coase is that the distinction between emittor and recipient of an externality is irrelevant: what matters is whether we achieve a higher-valued output by putting the liability on one or the other of the parties involved, and not who is the ‘source’ of the externality” (p. 230). This is one point upon which “conservative” or “neo-liberal” economists, who stand opposed to government interference in the market, are deeply at odds with libertarians such as Nozick. See also Charles Fried, “Difficulties in the Economic Analysis of Rights.”

22 I am not maintaining that the following is a problem for all possible property rights theories, for I suspect that the conclusions of virtually any acceptable moral theory can be echoed in some sort of rights theory.

23 Harold Demsetz, in “The Exchange and Enforcement of Property Rights,” p. 144, also questions why economists should have a different attitude toward pecuniary externalities, though he is concerned to argue for the moral demotion of nonpecuniary externalities, rather than the importance of pecuniary externalities. Scitovsky, Tibor in “Two Concepts of External Economies,” Journal of Political Economy, vol. 62 (1954), pp. 7082, and Shubik, Martin, “Pecuniary Externalities: A Game Theoretic Analysis,” American Economic Review, vol. 61 (1971), pp. 713–18, explain the lack of interest in pecuniary externalities by showing how they disappear in static general equilibrium, which is the standard theoretical perspective employed by economists.

24 See Sen, Amartya, Poverty and Famines: An Essay on Entitlement and Deprivation (Oxford: Oxford University Press, 1981).

25 A critical reader objected that I should argue that mass starvation raises questions of morality and justice rather than just appealing to intuition. But in my view one is very close to the foundations of morality here. I doubt that there are premises to be had that are more secure than is this “intuition.”

26 Just as, in Locke's view, the consent involved in the use of money justifies inequalities in riches. See his Second Treatise of Government, ch. 5.

27 On Nozick's view of what is voluntary (Anarchy, State and Utopia, esp. p. 263), the smith's decision would be voluntary. For on Nozick's view, a choice is voluntary provided that no rights are violated in limiting the alternatives. But the definition assumes that there can be no injustice done unless rights are violated, and it thus begs the question at issue here.

28 This claim is probably more a definition of transaction costs than a substantive truth. It is also dubious. See Kenneth Arrow, “The Organization of Economic Activity,” pp. 141–42, and Regan, Donald, “The Problem of Social Cost Revisited,” Journal of Law and Economics, vol. 15 (1972), pp. 427–38.

29 Carl Dahlman, “The Problem of Externality,” p. 210.

30 See Ronald Coase, “The Problem of Social Cost.”

31 “Proportional transaction costs do not generate Pareto-relevant externalities, but only the trivial Pareto-irrelevant variety” (Carl Dahlman, “The Problem of Externality,” p. 214). “If it costs smog breathers too much to set up the exchange that induces the emittors to reduce the outpour of pollutants, then it follows necessarily that, the funny smell notwithstanding, the optimal level of pollution has been achieved” (Carl Dahlman, “The Problem of Externality,” p. 216). The last “the” is indefensible.

32 Mill, John Stuart, On Liberty (rpt. Indianapolis: Bobbs-Merrill, 1965), pp. 114–15, makes the following remarks about a subset of these harms:

34 See Titmuss, Richard, The Gift Relationship: From Human Blood to Social Policy (London: Allen and Unwin, 1971); Arrow, Kenneth, “Gifts an d Exchanges,” Philosophy and Public Affairs, vol. 1 (1972), pp. 343–62; and Singer, Peter, “Altruism and Commerce: A Defense of Titmuss against Arrow,” Philosophy and Public Affairs, vol. 2 (1973), pp. 312–20.

35 See also Kenneth Arrow, “The Organization of Economic Activity,” p. 152; Thomas Scanlon, “Liberty, Contract, and Contribution,” p. 45; and especially Hirschman, Albert, “Against Parsimony: Three Easy Ways of Complicating Some Categories of Economic Discourse,” Economics and Philosophy, vol. 1 (1985), pp. 1619.

36 Marshall, Alfred, Principles of Economics (8th ed.; London: Macmillan, 1920; rpt. 1982), esp. pp. 237–39.

37 Consumers are affected, too, although they do not, in Marshall's terminology, suffer external effects. “Consumer surpluses” (Principles of Economics, bk. Ill, ch. VI) are the external economies experienced by consumers.

38 Pigou, A. C., The Economics of Welfare (2nd ed.; London: Macmillan, 1924), pt. 2, ch. 8.

39 Ibid., p. 152.

40 Lin, p. 1. He then cites the references mentioned above in footnote 3.

41 Walter Heller and David Starrett, “On the Nature of Externalities,” ed. Steven Lin, Theory and Measurement of Economic Externalities, p. 10.

42 Markets, Morals and the Law, p. 76. At this point, Coleman includes a footnote maintaining that “the distinction between externalities and external effects is widely misunderstood even in elementary economics texts” (note 18, p. 353). Maurice Lagueux, in “Neoclassicism and Neoliberalism on Externalities” (forthcoming), remarks more justly that

all of the following expressions (or equivalent expressions) were widely used to define externalities: “lack of appropriate property rights,” “market failure to reach optimality,” “interdependencies among consumption or production functions,” “side (or third party, or spillover) effects,” “impossibility of exclusion,” “presence of (wholly or partially) unpriced inputs or of uncompensated services,” “situation leaving room for a free rider (or free loader) effect,” “absence of appropriate negotiations due to excessive transaction costs” (p. 1).

43 “Towards a Theory of Property Rights,” p. 343.

44 “The Organization of Economic Activity,” pp. 145–48.

45 See Calabresi, Guido, “Transaction Costs, Resource Allocation and Liability Rules — A Comment,” Journal of law and Economics, vol. 11 (1968), p. 69. Carl Dahlman, in “The Problem of Externality,” p. 222, argues that the fact that the actual situation is suboptimal relative to a situation without transaction costs is no more relevant than is the suboptimality of a world with costly apples relative to a possible state of affairs in which apples could be produced costlessly. In his view, there are no such externalities, and the whole concept depends on the moral judgment (which he clearly does not share!) that government regulation is better than market interaction.

* This paper arose out of an interesting discussion in August 1989 with members of the Philosophy Department at the University of Sydney, for which I am very grateful. Maurice Lagueux and Michael McPherson provided essential assistance in the early stages of drafting this essay. Andrew Levine and Julius Sensat provided invaluable criticisms of earlier drafts. Comments on the penultimate draft by Richard Arneson, David Copp, Gregory Kavka, and Ellen Paul were particularly helpful.

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