“If you had possession of a plot of land and I profited by stealing it from you, that would be an externality. But my merely having something that you want is not creating a negative externality for you.”
But what gives you a moral property right over that land? If you don’t have any, then the fairest and the most efficient way to allocate it is to pay compensation, as set by the market, to those you exclude.
Not to do so is harmful in three different ways.
- Unlike labour/capital, land is irreproducible. Its value is a measure of its wealth and welfare creating potential. This potential varies greatly from location to location. Thus there will always be those excluded from the best locations, and those forced to live at the margin of production, harming the levels of wealth and welfare they would have enjoyed if they were the ones occupying the best locations. Without compensation for their loss, excessive inequality is baked into society.
- Without paying that compensation, the housing costs of landowners are lower than they otherwise would be. This pushes demand for land up, leading to its misallocation and over consumption ie a deadweight loss. This lowers the amount of wealth and welfare in an economy, which harms everyone.
- Excessive inequality thins markets and lowers the potential for economies of scale. Again this lowers output harming everyone.