property rights - department of agricultural...

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AGEC 603

Property Rights

• Definition

– A bundle of entitlements defining the owner’s rights,

privileges, and limitations for use of a resource

– Instrument of society

– Help people form expectations

• Transactions

– Two bundles of property rights are exchanged

– Value of these bundles of rights determines the value of

the exchange

Property Rights

• Universality

– All resources are privately-owned and all entitlements are

completely specified

• Exclusivity

– All benefits and costs accrued as a result of owning and using

the resource accrue to the owner and only the owner

• Transferability

– All rights can be transferred in voluntary trades

• Enforceability

– Property rights should be secure from involuntary seizure from

others

Property Rights- Characteristics

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• Well-defined rights promote efficiency - society’s

viewpoint

– maximize the net benefits from the use of a resource to society

• Net benefits – cost

• Society- includes both producers(sellers) and consumers(buyers)

– Owners pay all costs and receive all benefits

• They have a powerful incentive to use the resource efficiently

• Misuse hurts themselves

• Primary function is to guide actions of economic players

through a greater internalization of costs and benefits

• Emergence of Property Rights

– Dynamic system emerges with change in society

Property Rights- Efficiency

• Right to tax or support government

• Right to police – enforce rights

• Right of eminent domain – take rights away with just

compensation

• Right to take estate if no heirs and will

Property Rights – Govt. Reserves

Assumptions

• Homogenous product

• Freely mobile resources

• Perfect information

• Well defined property rights

Perfectly Competitive Market

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Demand - Surplus

Marginal WTPsPP1

P2

P3

L1 L2 L3 Land

PP1

P2

P3

L1 L2 L3 Land

Sum to get total benefits 0 to L2

• Consumer Surplus- difference between WTP as given by the demand curve and amount actually paid as given by the price

Consumer Surplus

PP1

P2

P3

L1 L2 L3 Land

Must pay P2 to get L2

Surplus 0 to L2 WTP more than you have to pay in the market

Supply - MOC

Marginal costsPP1

P2

P3

L1 L2 L3

Land

Sum to get total costs 0 to L3PP1

P2

P3

L1 L2 L3

Land

The supply of land to a particular use slopes upward to the right. Why – can change between uses. MOC gives the cost of supply the last unit of land.

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PP1

P2

P3

L1 L2 L3

Land

• Producer Surplus- economic rents above the firms’ cost of production. Below the price line and above the MOC

Producer Surplus

• Real source of wealth – production and exchange

• Self - interest

– Argued the voluntary self-interest of millions of

individuals would create a stable, prosperous society

without the need for central direction by the state

– Consumers want to maximize CS

– Producers want to maximize PS

• Invisible hand

• Perfect competition assumptions

+ no externalities

+ no barriers to trade

Merge Supply and Demand

Invisible Hand

P

Land

S

D

P

Land

S

D

http://commons.wikimedia.org/wiki/Image:AdamSmith.jpg

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Market Equilibrium

P

Land

S

D

P*

L*

Equilibrium

Supply = Demand

Market Equilibrium

P

Land

S

D

P*

L*

Costs

PS

CS

• Market system does not achieve economic efficiency

• Failure does not imply a barrier to market clearing forces but

rather marketing clearing forces do not maximize society’s net

benefits

• Causes

• Should we correct / how?

Market Failure

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• Exclusivity violated

– Cost or benefit not being internalized to the resource owner

• Market will not be at society’s efficient point

– Govt. intervention maybe necessary only if B > C

• Positive Externalities

– Gardens, landscapes

• Negative Externalities

– Pollution – water, air, noise, etc.

Externalities

1

1.5

2

2.5

3

3.5

4

4.5

0 5 10 15 20 25 30

Quantity

Pri

ce `

MC society = MC private +

externality

MC private

Society’s efficient point given by

MC society = Demand

P* = 3 and Q* = 7.75

Demand

Externalities - Efficiency Point

1

1.5

2

2.5

3

3.5

4

4.5

0 5 10 15 20 25 30

Quantity

Pri

ce `


externality

MC private

Market equilibrium given by

MC private = Demand

Pm = 2.50 and Qm = 10.75

Demand

Externalities - Market Equilibrium

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• Market vs. society optimum

– Price in market is to low

– Too much quantity is produced

– Too much of externality is produced

• Government intervention

– Tax

– Coase Theorem

– Command and control

– Transferable rights

Externalities - Summary

Externalities - Tax

• Proposed by A.C. Pigou

• Tax the externality- shift the MC private curve up by the amount of the externality– Market equilibrium will be at the efficient point given by society

1

1.5

2

2.5

3

3.5

4

4.5

0 5 10 15 20 25 30

Quantity

Pri

ce `


externality

MC private

Market equilibrium given by

MC private + tax =

MC society = Demand

Pm = 3 and Qm = 7.75

Demand

Externalities - Tax

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Hoggie the farmer’s

No control = $0

Low control = $20

High control = $150

Joe Nose the neighbor’s

No control = $100 health problems

Low Control = $20 a few health problems

High Control =$0 no health problems

Farm Odor Example

Society’s Optimal

Hoggies cost of control

Joe Nose cost of damages

Hoggies wants no control

Joe Nose wants high control

Society’s total minimized at low

• Command and Control

– Engineering approach

– Set a technology level used by polluted, usually same for all

• Can set at zero, low, or high levels of control

• Coase Theorem

– One of the most used ideas of economics by professions

outside of economics

– Used by judicial branch

• Define the right between two parties and then tell them to work it out by

themselves

Solution- Besides Tax

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• Coase Theorem

– Economic inventive based approach

– Give rights to the air to either Joe Nose or Hoggie

– Does not matter who gets the rights we will reach society’s

efficient point as long as rights are well defined and

transactions costs are low

• Ronald C. Coase

– British Economist

– Wheat vs. cows

– University of Chicago

– Nobel Prize Winner

Solution- Coase Theorem

• Rights to Hoggie

– Start with no control

– End up with low control

• Rights to Joe Nose

– Starts with high control

– End up with low control

– Difference who pays -- wealth impact

Hoggie the farmer’s MC

No control = $0

Low control = $20

High control = $150

Joe Nose the neighbor’s MC

No control = $100 health problems

Low Control = $20 no health problems

High Control =$0 no health problems

Hoggie vs. Joe

• Another economic incentive approach

• Permits set equal to the level of pollution desired

– To be able to pollute you must have a permit

– Permits can be freely bought or sold

• Firms make the following decision

– Control pollution

– Buy a permit

• Idea

– Low control cost firms will control pollution and sell permits

– High control cost firms will pollute but buy permits

– Society’s overall cost will decline

Transferable Rights

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• Optimal level of pollution is not zero

• Damages / technology helps determines optimal level

• Problem property rights are not well defined

– Exclusivity violated

– Externalities

• Engineering and economic incentive approaches

– KEY – all have different weaknesses and strengths

– Solution will depend on a mix of these approaches

– Politics along with science will be involved

Summary Pollution

• A good whose consumption is indivisible

– One person’s consumption of a good does not diminish the amount available to others

• Key – non-rival & non-excludable in consumption

– Examples• Warning systems (tornado sirens), landscapes, genetic diversity,

defense

– Example - ecosystem services

• Efficiency is not achieved

– Free rider

– Absence of excludability

Public Goods

• The benefits people obtain from ecosystems

• Necessary to support and maintain life and support economic activities

• Many of these services lack adequate substitutes, thereby requiring careful stewardship of the ecosystems providing them

• Classification

– Provisioning (food and water)

– Regulating (flood, gas and disease control)

– Cultural (spiritual, recreation, and cultural benefits)

– Supporting (nutrient cycling) services

Ecosystem Goods / Services

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Study Value

O’Rear Henry (1998) Nonmarket value for rice production and hunting

$132/acre

Turner (1991) Consumers' surplus for boating in Lake

Livingstone $35.21

Bowker and Stoll

(1988)

Whooping crane annual WTP per person $21-149

Kreuter et al. (2001) $5.58/ha/yr ($6.24 million) decline in ecosystem

services value for 1976-1991 from rangeland to

urbanized use in San Antonio area

Costanza et al.

(1997)

Ecosystems provide estimated $33 trillion in

services annually

Rosenberger and

Loomis (1999)

Ranch open space value to tourist $1,132/ group

trip

Ecosystem Value Examples

consumer 1

0

2

4

6

8

10

12

14

16

18

20

0 5 10 15 20 25 30Quantity

Do

llars

consumer 2

0

2

4

6

8

10

12

14

16

18

20

0 5 10 15 20 25 30Quantity

Do

llars

0

2

4

6

8

10

12

14

16

18

20

0 5 10 15 20 25 30Quantity

Do

llars

+ =

Market

KEY Horizontal summation of individual consumers’ demand

curve to get market demand curve

Only consumer 1

in the market

Both consumers

in the market

Market Goods - Review

Market Goods - Review

0

2

4

6

8

10

12

14

16

18

20

0 5 10 15 20 25 30Quantity

Do

llars

6 11 17

Demand

Supply

Market Equilibrium

P* = 7 Q*=17

Consumer 1

Q=6 at price 7

Consumer 2

Q=11 at price 7

7

12

0

5

10

15

20

25

30

35

0 5 10 15 20Quantity

Do

llars

3 8

Demand

Vertical Summation of

consumer demand curves

Why – indivisible (non-rival

and non-excludable) in

consumption

Only consumer 2

Red demand curve

Both consumers

Public Goods - Ecosystem

0

5

10

15

20

25

30

35

0 5 10 15 20Quantity

Do

llars

3 8

Demand

Supply

Society’s Efficient Point

S = D

Market

P*=10, Q*=8

Problem – indivisible

Public Goods

• At price =$10

– Consumer 1 -- 3 units of ecosystem services

– Consumer 2 -- 8 units of ecosystem services

• Let consumer 1 purchase first

– Consumer 1 buys 3 units

– Consumer 2 free rides and buys only 5 units but consumes 8 units (3 units from consumer 1)

• Let consumer 2 purchase first

– Consumer 2 buys 8 units

– Consumer 1 free rides and buys none but consumes 3 units (3 units from consumer 2)

Public Goods – Free Rider

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• Public goods are NOT goods supply by the public

• Goods that are indivisible in consumption

– Non-rival

– Non-excludable

• Market will undersupply public goods

– Free rider problem

– Vertical vs. horizontal summation

Public Goods – Summary

• In the U.S. private ownership– 60% of land

– virtually all cropland

– 62% grasslands, pastures, rangeland

– 63% forest lands

• 95% of all species listed by endangered species have some habitat on private land

• Competing uses for land other than an ecosystem services

• Market will under provide ecosystem services on private land

Importance to Land Economics

• Voluntary actions

– No govt. incentives or regulations

• Government persuasion

• Command and control

• Private markets

• Market type incentives

– Easements• Conservation

• Development rights

– Reserve programs

– Wetlands mitigation

Types of Actions

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• Voluntary actions

– No govt. incentives or regulations

• Government persuasion

• Command and control

• Private markets

• Market type incentives

– Easements• Conservation

• Development rights

– Reserve programs

– Wetlands mitigation

Types of Actions

• Command and control aspects - 1973

• Provisions limit the actions of both government and private landowners whose property provides critical habitat for listed species

• Prohibits takings

• Landowners’ incentives– avoid designation

– preemptive practices

• Spillover effects

• Has it worked?

• Essential flaw

Endangered Species Act

Texas Endangered Species Program

County Number of SpeciesBrazos 35Bexar 72Lubbock 23Harris 49El Paso 58Tarrant 28Travis 67Current as of Feb. 2017

http://tpwd.texas.gov/gis/rtest/

http://tpwd.texas.gov/gis/rtest/

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• Private firms – best interest to protect ecosystem services

– Ecotourism, hunting ranches, fishing clubs

• Usually some degree of excludability

• Small impact

– locally important

• Voluntary

Private Market

• An agreement between landowner and the “holder” of the conservation easement under which the landowner voluntarily restricts certain uses of the property to protect natural, productive, or cultural features

• Landowner retains legal ownership– but rights restricted usually lowers value

• Why use?– Desire to protect the land

– Legal and tax purposes

Conservation Easements

http://conservationeasement.us/browse/map - updated Feb 2017

Conservation Easements

http://conservationeasement.us/browse/map

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• Type of easement owner sells the rights to develop the land

• Compare to conservation easement

– Sell of rights vs. giving away the rights

– Generates income compared to generating tax savings – general

• Started in the mid 1970’s

Purchase of Development Rights

http://www.farmlandinfo.org/statistics as of Jan. 2018


State-Level Program Activity Totals - totals not by year.

2010 2011 2012 2013 2014 2015 2016 2017

Easements or Restrictions Acquired 11,899 12,415 12,970 13,450 13,981 14,541 15,020 15,551

Change 516 555 480 531 560 479 531

Acres protected 2,023,230 2,185,996 2,284,005 2,373,470 2,454,702 2,579,878 2,672,364 2,799,539

Change 162,766 98,009 89465 81232 125176 92486 127,175

Program funds spent to date in millions 3,058 3,243 3,416 3,622 3,782 3,887 3,969 4,103

Additional funds millions 185 172 205 160 105 82 133

Dollars / acre 1,512 1,484 1,496 1,526 1,540 1,507 1,485 1,466

Additional $/ AC 1,138 1,763 2,301 1,966 840 892 1,049

http://www.farmlandinfo.org/statistics as of Jan. 2019


State-Level Program Activity Totals - totals not by year.

2012 2013 2014 2015 2016 2017 2018

Easements or Restrictions Acquired 12970 13450 13981 14541 15020 15551 16065

Change 555 480 531 560 479 531 514

Acres protected 2284005 2373470 2454702 2579878 2672364 2799539 2943019

Change 98009 89465 81232 125176 92486 127175 143480

Program funds spent to date 3.42E+09 3.62E+09 3.78E+09 3.89E+09 3.97E+09 4.1E+09 4.25E+09

Additional funds ? 2.06E+08 1.6E+08 1.05E+08 82455702 1.33E+08 1.42E+08

Dollars / acre 1495.837 1526.193 1540.733 1506.726 1485.436 1465.627 1442.53

Additional $/ AC 2301.167 1965.564 839.8653 891.5479 1049.384 991.8602

http://www.farmlandinfo.org/statistics


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Acres Under Development Rights


As of Jan. 2019

Number of Easements


As of Jan. 2019

Acres / Easement


As of Jan 2019




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Cost of Development Rights


As of Jan. 2019Nominal dollars

Percent Program Funds


As of Jan. 2019

• Pays farmers to retire land from production

– yearly compensation

– 50% (usually) of initial costs for conservation practices

• Targets– highly erodible land - originally

– 1990 change to environmental benefit index

– wetlands, streamside buffers, wildlife habitat, and other lands determined to have ecosystem service benefits

• Differs from ESA and easements

Conservation Reserve Program



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Monthly Summary CRP November 2016

https://www.fsa.usda.gov/programs-and-services/conservation-programs/reports-and-statistics/conservation-reserve-program-statistics/index

Acres all programs 23.45 mil ac

Number of contracts 635,435

Number of farms 357,315

Average rental payment – all programs $76 / ac

FY 2016 Projected outlays

Rental Payments $1,577 mil

Cost-share $106 mil

Incentives $134 mil

Total $1,817 mil

Monthly Summary CRP October 2016


Acres all programs 22.46 mil ac

Number of contracts 604,017

Number of farms 339,391

Average rental payment – all programs $81 / ac

FY 2016 Projected outlays

Rental Payments $1,778 mil

Cost-share $107 mil

Incentives $56 mil

Total $1,942 mil

CRP Enrollment

https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/Conservation/PDF/CRPEnrollmentMar2016.pdf

Capped by law at 24 million acres, Sept 30, 2016 no new enrollments



https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/Conservation/PDF/CRPEnrollmentMar2016.pdf

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CRP Changes in Enrollment


• Benefits

– Farmer – cash payments

– Ecological

• Drawbacks

– Payment tied to ag. rent and not ecological services

– Monopsony

– Uncertainty• Additivity

• Leakage / Slippage

• Taxes – can lead to distortion

Benefits / Drawbacks

Wetlands Reserve Program

http://www.nrcs.usda.gov/wps/portal/nrcs/detail/national/programs/easements/wetlands/?cid=nrcs143_008419

The Wetlands Reserve Program (WRP) is a voluntary program offering

landowners the opportunity to protect, restore, and enhance wetlands on

their property.

Enrollment Options• Permanent Easement: A conservation easement in perpetuity. USDA pays 100

percent of the easement value and up to 100 percent of the restoration costs.• 30-Year Easement: An easement that expires after 30 years. USDA pays up to

75 percent of the easement value and up to 75 percent of the restoration costs.

• Restoration Cost-Share Agreement: An agreement to restore or enhance the wetland functions and values without placing an easement on the enrolled acres. USDA pays up to 75 percent of the restoration costs.

• 30-Year Contract: A 30-year contract option is only available on tribal lands. USDA pays up to 75 percent of the restoration costs.

Authority expired September 30, 2013 – currently no new lands.


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Wetlands Reserve Program

http://www.nrcs.usda.gov/Internet/FSE_MEDIA/stelprdb1075124.jpg

Prairie Pothole Region / Flyway

http://www.fws.gov/kulmwetlands/pothole_map.gif

Wetlands Mitigation

http://water.epa.gov/lawsregs/guidance/wetlands/upload/2003_05_30_wetlands_CMitigation.pdf

• Clean Water Act (CWA)• objective is to restore and maintain the chemical, physical, and

biological integrity of the Nation’s waters.

• Toward achievement of this goal• the CWA prohibits the discharge of dredged or fill material into

waters of the United States unless a permit issued by the Army

Corps of Engineers or approved State under CWA Section 404

authorizes such a discharge.

• Compensatory Mitigation• required to replace loss of wetlands and aquatic resources

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Compensatory Mitigation


Restoration: Re-establishment or rehabilitation of a wetland or other

aquatic resource with the goal of returning natural or historic functions and

characteristics to a former or degraded wetland.

•

Establishment (Creation): The development of a wetland or other aquatic

resource where a wetland did not previously exist through manipulation of the

physical, chemical and/or biological characteristics of the site.

•

Enhancement: Activities conducted within existing wetlands that heighten,

intensify, or improve one or more wetland functions. Enhancement is often

undertaken for a specific purpose such as to improve water quality, flood

water retention or wildlife habitat.

•

Preservation: The permanent protection of ecologically important wetlands

or other aquatic resources through the implementation of appropriate legal

and physical mechanisms (i.e. conservation easements, title transfers).

Mechanisms - Mitigation


• Permittee-Responsible Mitigation• Restoration, establishment, enhancement or preservation of

wetlands undertaken by a permittee

• Mitigation Banking• Permittees, upon approval of regulatory agencies, can purchase

credits from a mitigation bank to meet their requirements for

compensatory mitigation

• In-Lieu Fee Mitigation• permittee provides funds to an in-lieu-fee sponsor (a public

agency or non-profit organization).

Summary

• Just some of the programs

• just scratched the surface

• Wide-range of programs with different incentives

– know the differences and the impacts on

landowners

property rights - department of agricultural...

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