Property Rights (1) 1
Definition of Property Rights A method of assigning to particular individuals or groups the authority to select any use for specific resources. Goes beyond legal definition since it includes also social norms. Property consist of of use to the return from use to transfer those 2
Private vs. Common Ownership Private ownership individuals clearly defined (small) groups of individuals Common ownership only members of a group have access to resource public in general owns property 3
Private Property Rights Theory How are the sanctioned behavioural relations among individuals with respect to the use of resources or goods organized? Specification of norms to be observed limitations of use (e.g. zoning laws) restrictions on returns (e.g. price controls, taxation) specific rules for transfer (e.g. land) 4
Incentives Design of property is economically important. Actions usually cause cost and lead to returns (e. g. investment). Will the returns accrue to the individual that incurs the cost? Efficient incentives require: decision maker has to bear all cost and should receive all returns principle of internalization 5
Criteria For an Efficient System of Universality Property Rights rules must apply to all individuals Exclusiveness right to exclude other from use of a resource Transferability ability to transfer to others 6
Universality Assume a society without property Example: farmer sows but since there is no ownership of land and no protection against someone else harvesting Additional cost arise guarding the harvest looting someone else s harvest More efficient: legal protection establish property 7
Exclusiveness Possibility to exclude others from using the resource within legal limits Creates incentives to take measures to increase value of resource avoid damaging activities Incentive to invest: both risk and potential return are in the domain of the individual Alternative: common ownership leads to inefficiency - overuse 8
Tragedy of the Commons Example: commonly owned grazing land Each member of the community wants to maximize profits: equate marginal cost additional cow and marginal revenue additional milk or meat. Neglected: cost inflicted upon other members of the community less grass, lower yield Result: overuse, suboptimal Can be applied to fisheries, hunting, Solution: joint decision by all resource users individual private property of grazing land: user fee 9
Transferability (1) Remember: opportunity cost If a resource is valued differently by two individuals the one with the highest valuation should receive it Example: a piece of land is valued at 100 by person A (the current owner) and at 150 by person B. Achievement of higher return by transferring it from A to B at a price between 100 and 150. 10
Transferability (2) Transferability is important for division of labour Rights can also be transferred partially, e.g. leasing transfers the right to return, not ownership Important: transaction costs Postulate: transaction costs should be kept as low as possible Well functioning markets and well functioning legal systems (enforcement of contracts!) help to reduce transaction costs (minimum t. c.!?) 11
Protection of Property (1) Protection provided privately or by the state. Substitutability of private and public protection. Who pays (how much) for public protection? Problem of Public Goods non-excludability. Also important: social norms. In principle, there are two rules for protection property rule liability rule 12
Protection of Property (2) Example: hydro-electric power plant floods land HEP should be built if (expected) return is larger than (expected) return on e. g. farmland. Assume negotiation cost HEP and F are zero! Property rule requires F to agree payment: contracts with HEP-F are needed. Liability rule entitles F to damages: no contracts, but assessment by third party required. 13
The Role of Transaction Costs Without transaction costs both rules lead to the same payment (fairness assumed!)! Transaction costs / problems with property rule: negotiations with owners of farmland (how many?) hold-out problem: last negotiating owner Transaction costs / problems with liability rule: cost of assessment, legal cost, size of damage: difference between subjective and objective value of damage 14
Independence From Assignment of Property Rights Again assume no transaction costs! Important result: the outcome (solution) of the problem at hand will be independent of the original ownership of the resource (here land): when net return is positive, HEP will be built! Relevance of original ownership only for distribution: If HEP is given the right to flood, its profits will be higher since there are no payments to F required! 15