2. The Harm Principle and efficiency

Markets are often considered to have special moral status. This special moral status is, for example, expressed in the claim that even if market transactions generate harms, they are still permissible and do not warrant state interference. However, state interference into harmful conduct outside of the market can be straightforwardly justified by HP.

According to the original formulation of John Stuart Mill, HP states that ‘the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others’ (Mill Reference Mill and Robson1977 [1859]: 9). HP thus provides the conditions under which a state can coercively interfere with the conduct of its citizens. Contrary to Mill’s suggestion, I propose that there might be other reasons that allow the state to intervene with its citizens’ conduct. In order to account for this, the principle can be restated as follows:

A number of different versions of HP have been proposed in the literature.^{Footnote 4} The one I am promoting here is most similar to Feinberg’s version of HP, according to which ‘the need to prevent harm (private or public) to parties other than the actor is always an appropriate reason for legal coercion’ (Feinberg Reference Feinberg1987: 11). Conduct that harms others or is likely to harm others provides the state with a strong reason to interfere with such conduct, even if such a reason might be outweighed by other considerations. HP hence justifies state intervention in cases such as the following:

Pollution is a classic example of a non-market harm case. Most of us would agree that state interference is warranted in this case.Footnote ⁵ The villagers are not explicitly forbidden from using the river, even if they do not have any explicit property rights over it. PollMed Inc. is either harming the villagers by restricting their use of the river or by poisoning them, should they drink the water from the river.^{Footnote 6}

However, HP purportedly does not apply as straightforwardly when market transactions generate harmful consequences, i.e. market harms. Consider this case:

Contrary to non-market harm cases like Pollution, our intuitions are less clear in a market harm case like Ann’s Apples. It is clear that CheapPears Inc. generates a benefit for those customers who prefer pears to apples at the reduced price. But CheapPears Inc. is also imposing a harm onto Ann merely by competing with her. Harms which involve coercion, fraud or deception in the marketplace straightforwardly fall under the purview of HP.^{Footnote 7} However, this is not the case here, since Ann is being harmed merely due to price fluctuations emerging from market transactions. The harmful consequences resulting from these price fluctuations are the kind of market harms that I am concerned with in this article.

Authors across a broad political spectrum seem to support the thesis that market harms are morally unproblematic. More specifically, many support the claim that once so-called externalities have been eradicated, there is no strong reason for the state to interfere with market transactions even if the resulting price fluctuations generate outcomes that are harmful to some.Footnote ⁸ In this vein, Gauthier speaks of markets as ‘moral free zones’ (Gauthier Reference Gauthier1986), Dworkin argues that markets ought to be at ‘the center of any attractive theoretical development of equality of resources’ (Dworkin Reference Dworkin1981: 284) and Heath defends the position that if ‘all companies fully internalized all costs … it would be impossible to make the case for any further “social responsibility”’ imposed onto market participants (Heath Reference Heath2006: 551). In On Liberty, Mill himself also seems to suggest that market harms constitute an exception to HP:

This leads us to an important question: why would we advocate state interference in Pollution, but not in Ann’s Apples, even though persons are being harmed by others in both cases? Mill argues that the state ought not interfere with the success of a market participant to the benefit of her losing competitor, because doing so would undermine what is ‘better for the general interest of mankind’.^{Footnote 9} The most uncontroversial and common way for contemporary liberals to cash Mill’s idea out is that market economies, unless interfered with, are more likely to result in Pareto-efficient allocations of goods and services than non-market economies (Waldron Reference Waldron1987: 148; Freeman Reference Freeman2011: 36). An allocation of goods and services is Pareto-efficient if there is no alternative allocation available under which an individual could be made better off without making any other individual worse off.^{Footnote 10} This complements Mill’s view: reasons for state interference in accordance with HP are outweighed by efficiency concerns in the case of market harms. In other words: when it comes to market harms, efficiency concerns outweigh the pro tanto reason of harm prevention provided by HP.

A principle which captures this special status of market transactions can be stated as follows:

EEP prohibits the state from interfering with voluntary market transactions only if these transactions would have otherwise promoted efficient allocations of goods and services. EEP is a fairly weak principle: A proponent of EEP can endorse state interventions such as minimum wages, subsidies, welfare programmes etc., insofar as they do not interfere with individual market transactions that promote efficiency.Footnote ¹¹

Pro tanto reasons for state interference provided by HP will only be outweighed according to EEP if such interference would hinder a voluntary market transaction that promotes efficiency. This includes cases in which market harms emerge. Hence, EEP implicitly provides us with a concrete reason for why Ann’s Apples and Pollution do not both justify state intervention, even if both cases involve harm: State intervention in Ann’s Apples will lead to an inefficient outcome, i.e. a market failure, while state intervention (e.g. via optimal taxation) in Pollution will not upset efficiency. According to EEP, distorting an efficient allocation resulting from voluntary exchanges is unjustified. In order to understand why precisely EEP justifies state intervention only in Ann’s Apples, but not in Pollution, it is necessary to explain how both examples are discussed in economics.

3. Market harms and non-pecuniary externalities

Both Ann’s Apples and Pollution are standard examples of what economists refer to as negative externalities.^{Footnote 12} Externalities are unintended spillover effects of one agent’s actions on another agent’s level of welfare (Hausman Reference Hausman1992: 96). Formally, the presence of an externality can be described as follows:

$${{\partial {w_i}({x_1},{x_2},{x_3} \ldots ,{x_n},{y_j})} \over {\partial {y_j}}} \ne 0$$

Where w_i denotes the welfare level of individual i and activities ( $${{x_1},{x_2},{x_3} \ldots }$$ ) are entirely under i’s control, whereas activity $${{y_j}}$$ , with $${y_j} \ne 0$$ , is under j’s control, but has an impact on i’s level of welfare.^{Footnote 13} Economists typically contrast non-market harms (such as in Pollution), i.e. ‘non-pecuniary externalities’, with market harms (such as in Ann’s Apples).Footnote ¹⁴

Non-pecuniary externalities are externalities that are mediated ‘outside of the market’. In Pollution, PollMed Inc. is creating a non-pecuniary externality for the residents of the village. The polluting activity of PollMed Inc. is not a market transaction, but rather an action performed ‘outside of the market’. PollMed Inc. has internal costs, such as acquiring raw materials to produce their drugs, paying wages to their workers etc. The costs that PollMed Inc. does not incur are costs for waste processing that the firm shifts onto the villagers, thereby using the river effectively as a costless resource. This reduction in costs for waste processing, in turn, enables the firm to generate a higher output of drugs at no cost to themselves. In other words: PollMed Inc. does not internalize the social cost of their production.

Market harms are spillover effects that are mitigated via the price system, i.e. ‘inside of the market’. A market harm is a severe loss of welfare imposed onto a transacting or third party due to a price shift. Arguably, not all externalities resulting from price shifts constitute market harms. Often, price shifts impact third parties adversely, but they do not generate harms that would justify state interference according to HP and can therefore not be classified as harms in the sense that is relevant to our purposes here. But Ann’s Apples exemplifies an externality that amounts to a market harm. A shift in consumption preferences decreases the market price for apples. The exchanges between CheapPears Inc. and their customers affect Ann, who is external to their exchanges. Because customers prefer pears at the reduced price to apples, Ann suffers a severe welfare loss, since the decrease in demand for apples constitutes a loss of income for her.

The crux is that the presence of a market harm does not affect efficiency in a perfectly competitive market, while the presence of non-pecuniary externalities does. In a perfectly competitive market, every market harm is exactly offset by a countervailing benefit. However much profit sellers of a good lose when the price of the good declines is weakly less than what the buyers of the good gain due to the price reduction.^{Footnote 15} Since perfectly competitive markets generate efficient allocations, efficiency remains unaffected by market harms. Changes in price levels only have distributional effects.Footnote ¹⁶ Contrary to market harms, non-pecuniary externalities constitute inefficiencies which divert resources away from their socially optimal, i.e. efficient, use. In Pollution, PollMed Inc. did not internalize the entirety of their production costs, but instead shifted some of their costs over onto the villagers.

According to the classical, so-called Pigouvian analysis, if private costs and socially optimal costs are not aligned, this typically leads to over- or underproduction. More specifically, in the case of Pollution, PollMed Inc.’s drugs will generally be supplied at a price that is lower than and a quantity that is higher than the one that would have resulted in a Pareto-efficient allocation. Pigou’s discussion of inefficiencies generated by non-pecuniary externalities concluded that the only way to restore efficiency in such cases is by forcing the externality-producing firm (or consumer) to internalize their costs via state interventions (Pigou Reference Pigou1960 [1920]).^{Footnote 17}

In line with the Pigouvian conclusion, EEP tells us that because PollMed Inc.’s waste dumping generates an inefficiency, state intervention (such as optimal taxation of PollMed Inc.’s products) can be justified. In Ann’s Apples, promoters of EEP will argue that taxing CheapPears Inc. is unjustified, since it distorts the price mechanism and thus generates an inefficiency. In general, because market harms do not distort efficiency, but their prevention would, EEP thus establishes that the state is not justified to intervene with transactions generating market harms in otherwise complete markets.

The important take-away message here is that if the state interfered to prevent (or sanction) market harms in the way that it interferes to prevent (or sanction) non-market harms, market efficiency would be undermined. This grounds the exceptional status of market harms. In the next section, I argue that those who endorse EEP face a dilemma which forces them to choose between either promoting HP or promoting market efficiency.

4. Coase’s challenge

Until Coase’s famous essay ‘The Problem of Social Cost’ was published, economists sided with Pigou (and thereby HP) in cases involving non-pecuniary externalities such as Pollution (Coase Reference Coase1960). Contrary to Pigou’s analysis, the so-called ‘Coase Theorem’ stated that in the absence of transaction costs, which disincentivize market participants from engaging in voluntary exchanges with each other, externalities will be internalized efficiently via the market itself.Footnote ¹⁸ Thus, some economists classify the presence of externalities as an ‘absence of markets’ via which externalities can be bargained away (Arrow Reference Arrow1969). In what follows, I show how this crucial insight permits transforming many non-market harm cases into market harm cases. This, in turn, will have an impact on the range of cases in which state intervention is justified according to EEP.

Coase demonstrated that, given that transaction costs are low and property rights are well-defined, non-pecuniary externalities can be transformed into market harms.Footnote ¹⁹ In other words: we can alter Pollution (under the conditions of the Coase theorem) such that the harm the villagers incur merely constitutes a market harm. Consider the following case:

Our initial judgement in Pollution was that the state would, all things equal, be justified in intervening with PollMed Inc.’s pollution activity. The outcome that would have ensued if HP granted the villagers the right not to suffer from pollution would have been that PollMed Inc., in one way or another, would have been either forced or strongly incentivized to stop polluting at no cost to the villagers.

In Pollution*, two new elements have been introduced to the original example: First, an unjustly allocated property right to pollute and second, the possibility for a pareto-efficient bargain.Footnote ²⁰ In this section, I will focus on the latter and postpone the discussion of property rights to the next section. It suffices to say here that unjustly allocated property rights should clearly not be accepted as a reason not to intervene with PollMed Inc.’s pollution.

According to EEP, once the villagers and PollMed Inc. can bargain the externality away, state intervention is unjustifiable. This is so because the bargain struck between the villagers and PollMed Inc. is purely voluntary (in the sense that fraud, deception and coercion are superficially absent) and the resulting allocation is efficient, since the externality has been eradicated: A market for pollution has been created. Hence, there is a market price for eradicating the externality. This price is $501, exactly the amount that the villagers are paying for a non-polluted river. The non-pecuniary externality in Pollution has been dealt with by transforming it into a market harm in Pollution*. This, however, entails that the villagers also suffer a market harm by having their purchasing power reduced by $501.

The mere fact that the background conditions (assigning property rights in some arbitrary manner and introducing low transaction costs) to deal with the externality have been set in place should have no bearing on the employment of HP. None of the facts that justified state intervention via HP in Pollution have been changed in Pollution*. It is still the case that the villagers’ health is impacted by the waste dumping of PollMed Inc. in Pollution* as it was in the original case.

The significant problem that emerges from our discussion of Pollution* is that if the possibility to strike an efficient bargain outweighs considerations of harm, as suggested by EEP, state intervention will be unjustifiable in a large number of cases that are structurally identical to Pollution*.

Some readers might not be convinced that there is anything objectionable about the fact that the villagers ought to pay PollMed Inc. to stop the pollution of the river. Perhaps the following case, which exhibits the same structure as Pollution and Pollution*, is more compelling to them:

Should the state not intervene in order to protect Bob? Proponents of EEP have to conclude that the state is not justified in intervening with Alice’s behaviour, irrespective of how credible her threat of breaking Bob’s legs is. The only fact that matters is that Bob and Alice can strike a Pareto-efficient bargain. While it is unclear how EEP could justify state intervention in Breaking Legs, HP readily delivers an answer: If Alice credibly threatens to break Bob’s legs, the state is justified in interfering with her conduct, irrespective of whether an efficient bargaining solution is available.^{Footnote 21}

The challenge ultimately resulting from the Coase Theorem is this: given the right background conditions, every non-pecuniary externality can be transformed into a pecuniary externality, i.e. every non-market harm can be transformed into a market harm. According to EEP, the state is not justified in interfering with any market harms, since such interference would generate inefficiencies. However, blocking state intervention into all market harm cases in this way will prevent state intervention even in cases like Pollution* or Breaking Legs.

Proponents of EEP hence face a dilemma. Call its horns ‘opening the flood gates’ and ‘no exception’, respectively. If they stick with EEP and argue that market harm cases do not justify state interference, then they are opening the floodgates for non-interference even in cases such as Pollution* and Breaking Legs. Whenever efficient bargaining is possible, the state is unjustified in interfering in order to prevent harm to the relevant party, i.e. the villagers or Bob. This entails effectively abandoning HP in favour of an efficiency-based principle. The state will then only intervene in non-market harm cases if such interference does not threaten the possibility for efficient bargains. Hence, market harms are not an exception to HP because HP is effectively abandoned.

Alternatively, proponents of EEP can abandon EEP itself and argue that there is no exception for market harms. State interference is then pro tanto justified in virtue of a harm imposition and this pro tanto justification cannot be outweighed by efficiency concerns alone. This would entail that the state is justified in intervening in Pollution* and Breaking Legs. But it also entails that the state is justified in intervening in Ann’s Apples, because Ann is harmed by CheapPears Inc. and its customers, even if the harm is mediated via the price system. The upshot is that market harms are then not an exception to HP either, because they are treated on par with non-market harms.

At the beginning of this article I stated that proponents of HP have good reason to treat market harms on par with non-market harms. This is so because embracing the horn I called ‘opening the flood gates’ entails abandoning HP. But giving up on market harms as an exception to HP is an acceptable price to pay, since the possibility for efficient bargaining is not a fringe phenomenon, as is indicated by cases like Breaking Legs. It is worth pointing out that this result is not as shocking as it might appear at first glance for two reasons: first, HP only provides justification for state interference if natural persons stand at a risk of harm. Unless natural persons are significantly threatened by harm, the state is not justified in interfering with transactions between firms. Second, not every adverse price shift will constitute a market harm proper. While foregoing purchasing power is a nuisance to every market participant, not every instance of losing purchasing power counts as a harm that is sufficient to stimulate HP. Cases like Ann’s Apples, however, demonstrate that the loss of purchasing power (e.g. by losing one’s future income stream) can be equivalent to a significant harm.Footnote ²²

In conclusion, whether a harm is mediated via the price system or not should not make a difference to whether HP justifies state intervention or not. What ultimately matters is only whether an agent causes another harm, which is the case in Pollution, Pollution*, Breaking Legs and also Ann’s Apples. Those who think that efficiency concerns can trump the pro tanto justification provided by HP must give up on HP altogether.

However, some might object that state interference in Ann’s Apples is unjustified for reasons that are unrelated to efficiency concerns. The efficiency-based argument discussed so far constitutes only one possible (albeit the most plausible) argument in favour of treating market harms as an exception to HP. In what follows, I consider three commonly invoked, alternative arguments against state interference in market harm cases.

5. Property rights

Even if efficiency concerns are insufficient to establish that market harms are an exception to HP, alternative routes of justifying the exceptional status of market harms are conceivable.Footnote ²³ Consider the following argument by Thomson:

Thomson acknowledges that I do cause you harm, but nonetheless, I do not infringe any right of yours in doing so, since I do not tamper with your produce.Footnote ²⁴ Thus, the harm that I inflict upon you by competing with you in the market place is insufficient to justify a state intervention on your behalf. In other words: every market participant has a right to inflict market harms onto other market participants. This right is entailed by their property rights over their goods.

In Ann’s Apples, both Ann and CheapPears Inc. have property rights over their apples or, respectively, pears. Assume that neither stole or otherwise acquired their goods in a manner that violates justice. Hence, both prima facie justly acquired their goods. (Nozick Reference Nozick1974: 178–179) Furthermore, let us assume that their property rights over their apples and pears also include, in Honoré’s terminology, the ‘incidence of transmissibility’, i.e. a right to sell their goods (Honoré Reference Honoré and Guest1961).Footnote ²⁵

What the statement by Thomson then seems to imply is that state interference with the exchanges between CheapPears Inc. and their customers to Ann’s favour would violate CheapPears Inc.’s (and their customers) property rights, since both parties have a right to freely exchange their goods, insofar as they have acquired them justly. Prima facie, the condition of just acquisition is fulfilled in Ann’s Apples.

Contrary to this, neither PollMed Inc. nor Alice have acquired the goods that they use or attempt to exchange in Pollution, Pollution* or Breaking Legs. In Pollution, PollMed Inc. has no property right over the river and ergo neither the right to pollute it nor to exchange the right to pollution of the river. In Pollution*, PollMed Inc. has a legal property right over the river, but the right has by assumption not been justly acquired and thus does not constitute a moral right. In Breaking Legs, Alice has no property rights over Bob’s body. Thus, she cannot demand money for refraining from violating Bob’s right to bodily integrity. All of the non-market harm cases exhibit an unjust assignment of exchangeable property rights. Since the property rights in these cases have not been justly acquired, the state is justified in interfering in Pollution, Pollution* and Breaking Legs, but not in Ann’s Apples. We could thus stipulate the following principle:

Given that the initial assignment of property rights is just, it is unjustifiable to interfere with market harms resulting from exchanges of these property rights. A principle like PEP seems to provide a way to justify state intervention only in non-market harm cases, while prohibiting state interference in market harm cases. CheapPears Inc. and their customers prima facie justly acquired the property rights over their goods. If CheapPears Inc. and their customers are entitled to their property and exchange it, they are also entitled to the result of that exchange. PEP entails that state intervention on Ann’s behalf is unjust, even if Ann is exposed to a market harm as a result.

However, PEP leaves open the question which property rights assignments are just and which are not.Footnote ²⁶ Those who wish to argue that there is a relevant difference between cases of market harms like Ann’s Apples and cases of non-market harms like Pollution, Pollution* and Breaking Legs must provide a criterion according to which the initial assignment of property rights was only unjust in Breaking Legs and Pollution.Footnote ²⁷

But any criterion of just initial property rights assignments (such as the Lockean proviso) allowing for the exchange of property ought to be sensitive to severe market harms. Even if CheapPears Inc. and their customers have justly acquired their property and retain the right to trade it freely, market harms can leave third parties significantly worse off. Consider for example a variation of Ann’s Apples, Ann’s Apples*, in which Ann starves as a consequence of her having to shut down her apple stand. Our assessment that a particular assignment of property rights is unjust depends at least partially on such harms. Treating harm-related considerations as unproblematic exclusively in market harm cases requires arguments beyond the mere stipulation that the initial assignment of property rights which allowed for harms to come about was just. As Hausmann argues:

Severe market harms give us reason to doubt whether an initial assignment of property rights was just to begin with. Without offering further arguments (independent of efficiency considerations) which outweigh harm-related considerations, no property rights assignment that allows for individuals to end up severely harmed should be accepted as just.Footnote ²⁸

6. Consent

Another way to argue that state intervention is not justified in market harm cases is related to the notion of consent: Market participants consent to being exposed to market harms by transacting voluntarily with others. Hayek makes the following statement with regard to suffering market harms as a market participant:

According to Hayek, market harms are harms that market participants have consented to, because they have ‘agreed to play the game’. Inflicting harm on a victim that consented to being exposed to the harm does not warrant state interference via HP. This principle is also known as the maxim volenti non fit injuria (Feinberg Reference Feinberg1987: 115). In the example cases, the reason why it is justifiable for the state to interfere in Pollution on the villagers’ behalf is that the villagers have not consented to being exposed to liver damage. Neither did Bob consent to Alice breaking his legs. The reason why it is not justifiable for the state to intervene in Ann’s Apples is that Ann tacitly consented to potentially lose to her competition by participating the market. Prima facie, since Ann’s harm resulted from voluntary transactions between consenting market participants, state intervention is not justified. In what follows, I assume in accordance with Hayek that consent to market participation is sufficient to establish consent to suffering market harms. Nonetheless, I argue that the relevant kind of consent to market participation cannot be established in Ann’s Apples.

Authors such as Olsaretti, Hausmann and Wollner argue that this appeal to consent is far-fetched. Market participants typically have no reasonable alternative to participating in the market, because opting out of the market is unreasonably costly (Hausman Reference Hausman1992; Olsaretti Reference Olsaretti2004; Wollner Reference Wollner2013).^{Footnote 29} However, while Ann might not be consenting to participate in the market in general, she presumably consents to participating specifically in the apple market. Ann expresses her consent to being impacted by market harms by choosing to be a seller in the apple market, rather than a seller in the market for lemons, for example. Thus, Ann consents to being harmed as a seller in the apple market, since she is not changing professions.

The problem with this argument is not only that the availability of reasonably costly alternatives is an insufficient condition for consent in the market place.^{Footnote 30} Worse yet, if the costs associated with changing professions (or, more generally, markets) are positive, it fails to establish the required asymmetry between Pollution and Ann’s Apples. Suppose that Ann can choose between selling apples and selling lemons. Changing from selling apples to selling lemons is not costless for Ann. Even in an entirely unrestricted market, she would have to buy lemons first in order to sell them. This implies that the costs of transitioning to another market are effectively imposed onto Ann.

The crux is that, quite similarly, it is conceivable that the villagers in Pollution could move sufficiently far away to avoid PollMed Inc.’s polluting activity, even if this is costly to them, too. But, as HP dictates, the villagers ought not bear any costs for PollMed Inc.’s pollution at all. Even if the cost of changing location was minimal to the villagers, we would not read their refusal to move as them consenting to the pollution. However, in Ann’s case, precisely this is entailed by deriving Ann’s consent from her choice not to leave the apple market. If we concluded that Ann is consenting to being harmed qua apple seller because she does not transition to another market, we would have to conclude that the villagers are consenting to living nearby a polluted river, because they are not abandoning their homes. If choices associated with positive costs cannot be understood as expressing consent in the manner presented above, establishing an asymmetry in Ann’s Apples and Pollution fails. If the villagers’ refusal to move cannot establish their consent to being harmed via pollution, neither can Ann’s refusal to change markets establish her consent to being exposed to market harms.

In the quote above, Hayek implicitly points to an alternative source of consent, namely that Ann benefits from participating in the market. However, merely conferring a benefit onto Ann is insufficient to establish her consent. A more defensible position would claim that Ann would consent to enter the market if she could rationally expect to gain a net benefit from participation. This argument is being hinted at, for example, in Friedman’s claim that the ‘possibility of coordination through voluntary cooperation rests on the elementary – yet frequently denied – proposition that both parties to an economic transition benefit from it’ (Friedman Reference Friedman1962: 13).

For the sake of argument, let us assume that consent can be established via the net benefit criterion.^{Footnote 31} Clearly, neither Bob nor the villagers gain a net benefit in their respective cases and thus cannot consent to being exposed to harm. The criterion thus gets Pollution and Breaking Legs right.

The problematic cases in which consent is hard to establish in this way are cases such as Ann’s Apples*, in which Ann starves. Imagine that before starvation, Ann had to decide whether she would consent to participating in the market. Ann’s ex ante knowledge that she could starve due to being impacted by market harms must figure into the cost-benefit analysis required to establish her consent. Outcomes such as starvation, even taking into account the probability with which they will materialize, weigh heavily on the cost side of the calculation. The task of those who wish to argue that consent is nonetheless present in Ann’s Apples*, is to explain why such outcomes were ex ante sufficiently unlikely to undermine the prospect of an expected net benefit. As a general rule, the probability of being affected by excessive market harms crucially depends on the wealth available to the individual in question. After all, if Ann had sufficient wealth, she would be able to avoid starvation irrespective of her success as an apple seller. All things equal, the likelihood of Ann gaining a net benefit in the market, and ultimately her consent to participating in the market, thus depends significantly on her private wealth at the time she is supposed to give her consent. Rational individuals will not agree to participate in market procedures that are ex ante likely to harm them (MacLean Reference MacLean1982: 65). If an individual’s private wealth is insufficient for her to rationally expect that she will avoid significantly harmful outcomes due to market harms, she cannot consent to her participation in the market. Consequently, some individuals will be able to consent to their participation, while others will not. Given that the latter do not enjoy a sufficient level of wealth to cushion harsh market harms, the claim that it is necessarily rational for every individual to participate in the market is implausible. For those individuals for whom consent cannot be established, exposition to market harms would be morally on par with exposing them to ordinary non-market harms and hence warrants state interference according to HP. Without any redistribution of wealth allowing for the protection of market participants from severe market harms, consent is unlikely to be established.

7. Welfare state

As has been pointed out in the previous section, consent to market participation crucially depends on how likely it is that severe market harms impact individuals. The previous section established that the redistribution of wealth plays a crucial role in mitigating the impact of market harms. Welfare states provide institutional mechanisms for redistribution and provide assistance to those impacted by market harms.

The core of a welfare state are programmes designed to provide ‘general social assistance to those in desperate circumstances’ (Goodin Reference Goodin1988: 5). For example, if a citizen ends up unemployed in a well-functioning welfare state, the harm constituted by the loss of their future income stream, which might otherwise have caused severe harm, will be cushioned by generous unemployment benefits. Some authors even argue that welfare state programmes are a precondition for the legitimacy of markets (Goodin Reference Goodin1988: Ch. 6). Thus understood, welfare state programms are an ex ante measure for mitigating market harms. Call this the ex ante perspective. Alternatively, welfare state programmes can be understood as a form of compensation for market harms. The latter interprets welfare state programmes as an ex post measure of mitigating market harms. Call this the ex post perspective. Notice that the ex ante perspective is more ambitious than the ex post perspective. It implies that without a functioning welfare state, no market transaction, including mutually beneficial ones, can be justified. While I am sympathetic to this perspective, I do not aim to defend it here and thus discuss only the ex post perspective, as depicted above.

By embracing the ex post perspective, one could argue that appropriate welfare state programmes preempt HP. Consider the following principle:

Market harms only raise issues of justice because they impose severe welfare losses onto some market participants. Welfare state programmes prevent such losses from affecting market participants. Imagine a variation of Ann’s Apples*, in which Ann receives generous unemployment benefits that prevent her from starving. WSEP effectively rules out further interference into CheapPears Inc.’s exchanges only under the condition that Ann does not suffer any severe market harms. Prima facie, it follows that market harms in a properly functioning welfare state do not raise any issues of justice. Market harms are then an exceptional kind of harm not subject to HP, but rather subject to welfare state compensation.

This line of reasoning faces a challenge: because WSEP allows welfare state programmes to take precedence over HP, the burden of compensating for market harms is assigned to those who fund welfare state programmes, rather than those who impose market harms onto others.

Welfare state programmes constitute a kind of social insurance. The risk premiums are typically paid for by citizens and firms via taxation.Footnote ³² As stated at the beginning of this section, the welfare state’s core function is to protect its citizens from adversity. This is achieved via social insurance. The term ‘adversity’ encompasses various sources of harms, such as harms that are not man-made (e.g. harms resulting from natural catastrophes) and harms that are man-made, but self-regarding (e.g. harms inflicted upon oneself due to a mental disorder). Contrary to this, HP is designed merely to prevent or rectify other-regarding, man-made harms. But under special circumstances, the welfare state might also protect its citizens from man-made, other-regarding sources of harm, such as lung cancer contracted from second-hand smoke. Depending on one’s conception of the welfare state, HP and the welfare state can share overlapping jurisdictions. WSEP explicitly advises that welfare state programmes ought to take precedence over state interventions via HP in the case of market harms.

Many sources of other-regarding, man-made harm not covered by this social insurance fall under HP’s domain. If Alice breaks Bob’s legs, HP dictates that she ought to be punished for her conduct. Proponents of HP can justify such punishment either in order to deter her and others from future harmful conduct or because Alice’s wrongdoing requires retribution (Edwards Reference Edwards2014: 256).Footnote ³³ But WSEP does not require Alice to be punished. It just requires that Bob be compensated for the harm he incurred. Such compensation imposes burdens onto taxpaying citizens who pay into the social insurance scheme. But for Alice to be punished, the burden imposed onto her must be disproportionately higher than the burden imposed onto any taxpaying citizen who was not complicit in harming Bob. This is precisely what WSEP denies in market harm cases. If CheapPears Inc. and its customers harm Ann, all taxpaying citizens pay to compensate Ann. No disproportional burden is placed onto CheapPears Inc. and its customers.

Those who wish to promote both HP and WSEP propose that only in market harm cases, HP’s requirement to punish those who harm others be alleviated. Thus, Alice would be punished, but CheapPears Inc. would not. But justifying this disparity in treatment requires that the proponent of WSEP explains what the morally relevant difference between market and non-market harms is. Simply arbitrarily stipulating such a difference is not enough. From the earlier sections in this paper, it should be clear that this difference cannot be derived from either efficiency or property rights considerations.

If proponents of WSEP fail to provide a justification for treating market harms and non-market harms differently, appropriate state interventions ought to be implemented. If the burden of rectification imposed onto Alice in Breaking Legs ought to reflect her wrongdoing, then so should the burden of rectification imposed onto CheapPears Inc. and their customers for harming Ann.^{Footnote 34}

The state can accommodate this requirement via various policy measures, ranging from progressive taxation reflecting one’s causal involvement in (or likelihood of) generating significant market harms to restricting the exercise of the right to exchange one’s property freely, e.g. via the introduction of quotas. Without an independent justification of the asymmetrical treatment of market harm and non-market harm cases, proponents of WSEP merely postpone providing an answer to the challenge why market harms ought to be treated differently from non-market harms.