Virginia Postrel is appalled but not surprised at the Kelo v. New London verdict. She notes somethng I hadn’t thought about, just what is the definition of an externality:

While Kelo rightly sparks the immediate demand for
political action, motivated by a visceral sense of injustice, over the
long run a lot of intellectual work needs to be done. Kelo is
the logical result of the argument that spillovers of any sort–in this
case, the positive effects of business development–constitute
externalities, and that externalities justify government intervention.
What’s wrong with that argument? If it’s fine for air pollution (as I
believe it is), why doesn’t it apply to refusing to sell your house to
a business that would enrich the local area? Why doesn’t it apply to
offensive speech?

These are not easy questions, and they need to be asked. As
political scientist Aaron Wildavsky warned before his untimely death in
1993, "externality" (and even "pollution") is an elastic, socially
constructed concept whose application depends on what you like or
dislike. If spillovers are all it takes to justify government action,
liberalism’s most basic freedoms–from freedom of speech to private
property–cannot survive.

This is really rather important. As Richard Layard has claimed in his lectures (.pdf, and the basis of his recent book, Happiness), my having higher earnings than you (or, as is more likely, vice versa) is a form of pollution which it is entirely right and correct that the Government should tax to remove. It actually provides half of his justification for 60% marginal tax rates, i.e. 30% marginal rates are justified by that (moral? spiritual?) pollution that income inequality creates. (The other 30% is justified by habituation.)

So it does indeed seem that we need to have a slightly more rigid debate about exactly what is and is not an externality…for in this argument it appears that envy is one.