That definition, if minimized, leads to economic waste, because it fails to reflect opportunity costs.
To illustrate with an example, my absolute favorite soda of all time is Mountain Dew Pitch Black II. It is also one of the most hated flavors among most people I've met who tried it.
There exist sufficient customers who like Mountain Dew Pitch Black II for Pepsi to make a profit producing it. Are they losing money by not producing it?
As it transpires, no. There exist -many more- customers for -other- flavours of soft drink Pepsi could be producing. Pepsi doesn't have unlimited manufacturing capacity; they use the same equipment to produce a wide range of drinks. The opportunity cost of producing Mountain Dew Pitch Black II is that they -aren't- using that equipment to produce a more popular flavor. So I'm out of luck, and the limited run is all they produced. (There was a Pitch Black I and a Pitch Black III, neither of which I had opportunity to try; Pitch Black III had an even more limited run than Pitch Black II.)
Producing Pitch Black II would be a -waste of resources-, in spite of the fact that it could be profitably manufactured. In terms of utility, it is a suboptimal utility-maximizing strategy.
So if we're using underproduction as some kind of moral yardstick, I think it's rather flawed, on account that we wouldn't actually prefer the universe in which underproduction didn't happen.
That definition, if minimized, leads to economic waste, because it fails to reflect opportunity costs.
Sorry. In the context of microeconomics, "cost" usually means "opportunity cost" and I didn't realize I needed to say this explicitly. Dollar costs are usually a pretty good proxy for opportunity costs in many cases, though...
Example nicked from this online Berkeley lecture.
Monopolies are bad (morality and economics agree here).
Firms that pollute are bad (morality and economics agree here).
What about monopolies that pollute?
What about strong monopolies that pollute and receive government subsidies?
Well...
Pollution, and other negative externalities, cause firms to produce too much of their product. That's because they don't pay the full cost of the product, including the impact of pollution.
The equilibrium behaviour for monopolies is to produce too little of their product, to keep prices and profits high.
So a monopoly that pollutes is subject to two opposite tendencies: the unpriced-pollution tendency to produce too much, and the monopolistic tendency to produce too little. If the effects are of comparable magnitude, then the monopoly might be much closer to social optimum than a free market would be (the social optimum, incidentally, will generally involve some pollution: we need to accept some pollution in the production of fertiliser, for instance, in order to have enough food to stop people starving).
In fact, if the monopolistic effect is too strong, then the firm may under-produce, even taken the pollution effect into account. In that case, we can approach closer to the social optimum by... subsidising the polluting monopoly to produce more!!
And that, my friends, is why economics is not a morality tale.