Advertising, alcohol, tobacco, meat production, online gambling, excessive daily gaming are all net harmful and yet here we are.

Just because something is (considered) harmful to society doesn’t mean that it is right of the government to use monopoly of violence to prevent individuals from it. Some things, of course, but it is not sufficient.

Lest you’re looking at a moralizing authoritarian government as a good thing.

An economic argument might be that a person buying an arm must be able to make better use of it than a person selling an arm (e.g. the buyer can pay the seller enough to incentivize it), so therefore it is more productive to society to allow the transaction.

It doesn't follow that when two individuals are incentivized to transact with one another, that that transaction has a net positive impact on wider society; there may be negative externalities. Additionally, people are not always completely rational and perfectly informed agents, which means that not all voluntary transactions do render positive value to them. Selling your arm is vanishingly unlikely to be an efficient use of resources, particularly as arms are not fungible (you cannot change your mind later and reacquire an arm). An arm is just much more valuable when attached to a person, and if the economic incentives point the other way, we should probably look for how such a perverse situation came about, rather than fire up our circular saws.

Yeah, this is the argument for bitcoin, that if the transaction occurs then it must make sense for society.

I'll play devils' advocate here. Why is this harmful?

Say you're a middle class gentleman, rich but humane cannibals offer you 5 million dollars if they can have a surgeon remove your arm, so they can eat it.

Losing and arm will be tough, without that $5 mill it'd be very tough, especially to keep work. Since you're rich you're not going on disability or anything, so really it's self-sustained.

The only person out anything is the person who lost the arm. How is this harmful to society?

I'm not certain it is, I'm not saying it's right either... I mean obvious it's not normal, but is it really "harmful"?

This extremely unlikely situation hinges on profound wealth inequality. Only someone staggeringly, fantastically, mind-bogglingly rich (and also completely nuts) would blow 5 million on eating a human arm. And only someone who is really struggling in life would contemplate such a huge sacrifice for mere money. Since the actual variation in human ability, and therefore economic potential, follows a tame bell curve as opposed to the radically skewed distribution of wealth that this scenario requires (and that we actually see), this represents a market inefficiency. If we permit this transaction to take place, the economic potential of the formerly-armed takes a huge hit, while Cannibal Jeff Bezos does not enjoy a corresponding gain. Thus not only is the transaction negative-sum, but the inequality (and hence the inefficiency) is exacerbated.