Sean from the webpack Team! I'll do my best in lieu of our documentation still in progress to answer your question here!

According to the ECMA Module Spec (I'm not going to try and find the link so you'll have to trust me here because it's buried),

whenever a module re-exports all exports, (regardless if used or unused) they need to be evaluated and executed in case one of those exports created a side-effect with another.

For example I've created a small scenario with a photo to better visualize the case:

In this photo we see three modules imported into a single file. The imported modules are then re-exported from that module:

You can see here that none of the re-exports are effected by each other, therefore (if webpack was given a signal), we could omit exports b and c from even being traced or used (size and build time performance benefits).

However in this case, we see that exports c is "effected" by local state changes because it is reassigned to the summation of b and a. Therefore, (which is why the spec calls for this), we would need to include both b and a and any of its dependencies into the bundle.

We chose "sideEffects: false" as a way to save on both compile time and build size because this allows us to instantly prune (explicitly) exports that developers/library authors know are side-effect free (at the expense of a property in a package.json, or 2-3 more lines of config).

Although technically this example is very primitive, when you start dealing with Frameworks or Libraries that re-export a bunch of modules up to a higher level for Developer Experience (Three.js, Angular, lodash-es, etc), then performance gains are significant when (if they are sideEffect free module exports) you flag them in this manner.

Additional Clarifications:

1. Obviously side-effects means something particular in fp and would include logging (console or elsewhere) and the throwing of errors. I'm assuming in this context these are perfectly acceptable?

In the case that this is trying to solve, yes. As long as effects created against module exports aren't effected by others that would cause pruning to not be acceptable.

2. Can a module contain circular references and still use sideEffects: false?

It should, in theory.

3. Is there any way to verify or that a module is able to use sideEffects: false beyond trying to track down errors caused by its misuse?

Not that I know of, however this would be a great tool.

4. Are there any other factors that would prevent a module from being able to use sideEffects: false?

If the property is not in package.json or defined in module.rules, or mode: production is not set (which leverages the optimization).