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Israel recently forged Australian passports to perform an assassination of a Hamas leader in Dubai. Australia has expelled an Israeli embassy official in protest. If Australia thought assassinating that person was a bad thing to do, obviously we ought to punish Israel both for harming us like this and performing an assassination we disapprove of. But if, like most Australians, you are broadly supportive of Israel compared with Hamas or Hezbollah a case can be made that the assassination was the right thing to do. Should Australia then punish Israel even if we think they did the right thing by forging our passports? What if we care about Israel fully as much as we care about ourselves?
By punishing them regardless, we preserve the value of our passports and appear to be less slavishly supportive of Israel than we would otherwise. Any harm we dish out to Israel in response probably proportionally reduces the harm to us from our passports losing credibility by discouraging other countries from forging them. We give them good reason to ensure that any use of Australian passports does not become public (which is the only time when it harms Australia). Punishment also means that they will be less inclined to use the passports frivolously, but rather only when truly necessary. In fact, even if we cared as much about Israel’s interests as much we did about our own, it would be optimal if we could transfer all the costs we incur from their abuse of our passports onto the Israelis, so long as punishment were free. Then they would only use the passports when the total benefit outweighed the total cost, or to put it another way, they would only exploit our passports in ways we would approve of them doing so if they asked.
If transferring the harm to Israel is costly to us (that is, it is not offset by reduced harm to us), the optimal amount of punishment is less than the harm we incur. This is simply because when the price of something (in this case passing on the right incentives to people) goes up you should use it less.
If Israel already cares about Australia’s welfare and the punishment is costly, then punishing them with the full amount of harm that we suffer would result in a suboptimal exploitation of Australian passports from our perspective. This is because Israel would ‘double count’ the harm: once when we suffer it, and again when we suffer the costs of imposing the punishment. The more they already care about us, the lower is the optimal amount of costly punishment. Finally, if they care about us as much as about themselves and punishment is free, it doesn’t matter what we do.
In a similar analysis punishing BP for the oil spill in the Gulf of Mexico can be a good idea, even if it were an accident.