Property Rights

Wednesday, Feb. 1

Property Rights

• Bundle of entitlements defining the owner’s rights, privileges, and limitations for use of a resource (Tietenberg)

• Rules that specify both the proper relationships among people with respect to the use of things and the penalties for violating those proper relationships (Randall)

Non-attenuated property rights are:• Completely specified• Exclusive• Transferable• Enforceable and enforced

How is property held?Who has rights of use?

• Private property• Common property• Public property• Open access (res nullius)

Coase Theorem:

• When property rights are fully specified, assigned, transferable, divisible, secure and transaction costs are zero– Trade eliminates the pareto relevant

externality– Resource allocation is invariant to

the initial assignment of resources

$

P

Consumer surplus

q Q

MB

A quick review…

$

P

q

Producer surplus

Q

MC

$

P

q

S

DQ

Total welfare = PS + CS

Another Property Rights Parable

$

Q sound

MB of sound

Two roommates:

Jose wants to study, Ben wants to watch TV

Ben

$

Q quiet

Jose

MB of quiet

• What Ben is willing to accept to turn down the TV tells you how much he values sound

• What Jose is willing to accept to turn up the TV tells you how much he values quiet

• So– MB of sound to Ben = MC of quiet to Jose– MB of quiet to Jose = MC of sound to Ben

$

Ben

MB of sound

Q Sound Q quiet

Jose

MB of quiet

$

$

Q sound

MB of soundBen

$

Q quiet

JoseMB of quiet

Jose: MB of quiet = MC of quiet

Ben: MB of sound = MC of soundEfficiency

$

Q sound

MC of sound

MB of soundP

q

What if:

Jose lived there first, so Ben has to bribe him in order to watch TV at an agreed upon volume

$

Q sound

MC of sound

MB of soundP

q

What if:

Ben lived there first, so Jose has to bribe him in order to keep the TV at low volume

$

Q sound

MC of sound

MB of soundP

q

MB and MC curves drawn as linear for simplification

• When property rights are fully specified, assigned, transferable, divisible, secure and transaction costs are zero (and zero income effect)– Trade eliminates the externality– Final resource allocation is invariant

to initial assignment of resources/rights

This is the Coase Theorem

sound

What if transaction costs are not zero?

Ben doesn’t speak Spanish, Jose doesn’t speak EnglishJose has to bribe but the marginal benefit of each additional amount of quiet is lower.$

Q quiet

JoseMB of quiet

MB’

$

Q sound

MB of soundBen

$

Q quiet

JoseMB quiet

q0

p0

q1

$

Q sound

MC of sound

MB of sound

P

q0

MB’

Ben doesn’t speak Spanish, Jose doesn’t speak English

Ben has to bribe, but the marginal benefit of the same volume is lower.

q1

$

Q soundq0

p0

q1

MC

MC’

MB

$

MC

MB

MB’

q0q1 Q sound

Jose has to pay Ben, transaction costs are smaller

Ben has to pay Jose, transaction costs are higher

q0 = q0 q1 > q1p0

Jose bears lower transaction costs so “gives up” less than Ben.