Property Rights

Consequences of a lack of PR: Increased opportunism

-Individuals or groups are incentivised to exploit the lack of private ownership e.g. use intellectual property without paying for it e.g. not possible to put a boundary around a song → individuals can 'steal' music and lyrics → with modern technology, it is easily possible to download music without paying for it. -Another example of the free rider problem → shows that the price mechanism is less effective at pricing goods that can easily be stolen.

Consequences of a lack of PR:Misuse/overuse of scarce resources

-Lack of property rights means people are more likely to pollute the environment e.g. dump plastic into the oceans. -This problem is made worse by moral hazard - that is, assuming your action doesn't matter because someone else will deal with the problem e.g. clear the plastic from the ocean

What are some examples of PR?

-National Rivers Authority, now part of the Environment Agency, was created with powers to act 'as if' it owned the UK's rivers & waterways → allows it to police rivers & waterways and sue polluters and opportunists, such as poachers. -Other examples: -Laws to protect physical property e.g. criminal offence to take someone's property without their permission; -Intellectual property rights: a) copyrights to protect ideas, songs, music, designs, books and films; b) patents to protect inventions; c) trade marks to protect commercial images and logos. -Property rights can also be extended by creating territorial waters around a coast e.g. protect fishing grounds

Granting new or extending existing PR

-Ronald Coase: granting new or extending existing property rights encourages the owners to protect the resource by allowing them to sue those who exploit the resources -Owners of resources under attack from pollution will now be able to sue the polluters → ownership rights empower property owners to be able to police the use of their property and penalise those who misuse it.

What are the consequences of a lack of property rights?

1) Increased Opportunism (encourages free rider problem) 2)Misuse.overuse of scarce resources 3)Overproduction of goods with negative externalities 4)Limits economic development

Consequences of a lack of PR: Limits economic development

According to Peruvian economist, Hernando De Soto, a lack of property rights is also associated with: -urban squalor, and -significant constraint on economic development

How could a lack of PR be remedied?

By granting new PR's or extending existing PR

Definition of property rights

Confer legal control or ownership of a good or services i.e. makes it possible to exclude others from benefiting from a good or service → moves something to being more like a private good (rival & excludable) if it isn't one already

How does granting new or extending existing property rights help to ↓ pollution or overuse of scarce resources?

Existence of property rights means its is now possible to enforce ownership of resources → sue polluters → fined by the courts → forces them to internalise the true cost of the activity → assume XMC from pollution of £40,000 (e.g. MSC = £50,000 but MPC only £10,000) → if the courts impose a fine of £40,000 on the polluter it forces the polluter to internalise the true (full) cost of their actions → now pay the MSC instead of just the MPC → market now signals to firm that polluting activity is less profitable → incentivises them to allocate less resources to production → get socially desirable output (where MSC = MSB) instead of overproduction → market now allocatively efficient i.e. no longer failing

Why are property rights important?

For markets to operate efficiently, property rights must be clearly defined and protected - perhaps through government legislation and regulation. Without property rights markets are less efficient → effectiveness of markets in terms of the allocation, pricing and rationing resources is substantially reduced → mkt failure in the form of overproduction will occur → i.e. absence of boundaries allows free-riders uncontrolled access, which can result in the over-exploitation or misuse of the resource (e.g. TOTC)

Consequences of a lack of PR: Overproduction of goods with -ve externalities

Lack of property rights results → no way to make firms internalise the full cost of their actions and account for the 3rd party costs (XMC) they generate → receive a too high a profit signal from the market →incentivised to overallocate resources to the harmful activity → exhaustion of resources & overproduction of the harmful activity