Dave opens up a bar in Superior.  The bar imposes additional costs
upon neighbors (congestion/noise) and the bar also reduces the revenue
Al had been earning from his bar.  Before Dave opened up his bar, Al
had been earning $30,000 more per week than he is now earning.

An economist argues that Dave should be held responsible for the costs
his bar imposes upon the neighbors but should not be held responsible
for the loss in revenue Al faces. Carefully explain why an economist
would make such an argument.

Hello.

An economist would argue that Dave should be held responsible for the
costs
his bar imposes upon the neighbors because those costs (i.e.,
congestion and noise) are "negative externalities" that affect the
neighborhood as a whole. Because of the congestion and noise, even
people who are not patrons of Dave's bar will be affected by it.
Economists call such things as noise and congestion "externalities"
because they are not reflected in the underlying internal transaction
(i.e., the transactions taking place at Dave's bar).

Here's a good explanation of the concept of externalities:

"...generally the price you pay for something reflects the costs and
benefits provided for by your purchase. In short, the price you pay
often reflects the benefit you enjoy in consuming a good or service
and the cost the provider pays in producing that good or service.
   Sometimes, however, when you purchase a good or service others who
were not directly engaged in that transaction benefit or suffer as a
result. Economists call these costs or benefits EXTERNALITIES. When
those not directly engaged in a transaction suffer from the
consumption of a good or servce, we call that a NEGATIVE externality.
Likewise, when a beneficiary of a good or service not directly engaged
in the transaction doesn't pay for the benefits he/she receives, we
call that a POSITIVE externality.
   When externalities exist, seemingly beneficial market transactions
may be inefficient or counterproductive and wasteful from the
perspective of the total society. In these cases, government
regulation, taxes, or subsidies might be justified to either lessen
society's costs by limiting activities that cause negative
externalities or increase society's benefits by encouraging activities
that have positive externalities."

source:
"Externalities defined," hosted by Cuny.edu
http://web.jjay.cuny.edu/~thematic/umbach/fallburgers/externality.html

Also see:
"When Jack and Jill Make a Deal"
http://philosophy.wisc.edu/hausman/papers/jack-and-jill.htm

--------------

Al's losses are called "pecuniary externalities" and are not something
for which economists say that Al should be compensated. In one sense,
the reduced earnings at Al's bar are indeed a negative effect of
Dave's bar.  Dave has caused Al to earn less. However, economists view
Al's reduced earnings quite differently than they would see things
like noise or congestion. The neighborhood as a whole is not suffering
because of Al's reduced earnings.

Al's reduced earnings are simply the result of consumer choice. Dave's
bar is apparently providing something that consumers prefer.  For
whatever reasons (e.g., cheaper drinks, better drinks, livelier
atmosphere, etc.), drinkers have substituted Dave's bar for Al's bar.
Bar patrons have replaced whatever they were getting Al's bar with
something superior (or at least equal) at Dave's bar. To regain his
business, Al will need to either improve his products or services,
lower prices or both. This is the competitive market at work. Al's
losses are Dave's gains while consumers benefit from their
competition.


Here's an excerpt from a good explanation of "pecuniary externalities"
from David Friedman's "Why Is Law?: An Economist's View of the
Elephant":

"...I mentioned earlier a special sort of externality called a
pecuniary externality, one that imposes no net cost, since the effects
on other people cancel out. Unlike other externalities, a pecuniary
externality does not lead to inefficiency, since the actor's private
net costs are equal to total net costs, just as they would be if there
were no externality at all. My example was the externality I imposed
on my neighbor by putting my house on the market when he is trying to
sell his.
The implication of the argument is that my neighbor ought not to be
able to collect damages from me for the reduction in the price of his
house. Competition should not be, and is not, a tort. That particular
legal principle appears in the common law at least as early as 1410,
when the owner of one school sued a competitor for taking students
away from him–and lost."
source: David D Friedman - Law & Economics
http://www.daviddfriedman.com/Academic/Course_Pages/L_and_E_LS_98/Why_Is_Law/Why_Is_Law_Chapter_3.html


search strategy:
"externalities are"
"pecuniary externalities", competition

I hope this helps.