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Property rights are constructs in economics for determining how a resource or economic good is used and owned, [1] which have developed over ancient and modern history, from Abrahamic law to Article 17 of the Universal Declaration of Human Rights. Resources can be owned by (and hence be the property of) individuals, associations, collectives, or governments. [2]
Property rights can be viewed as an attribute of an economic good. This attribute has three broad components, [3] [4] [5] and is often referred to as a bundle of rights in the United States: [6]
Economists such as Adam Smith stress that the expectation of profit from "improving one's stock of capital" rests on the concept of private property rights. [7]
The fields of economics and law do not have a general consensus on conceptions of property rights. [8] Various property types are used in law but the terminology can be seen in economic reports. Sometimes in economics, property types are simply described as private or public/common in reference to private goods (excludable and rivalrous goods like a phone), [9] as well as public goods (non-excludable and non-rivalrous goods, like air), [10] respectively. [11] Below is a list of the several property types defined and their relation to the economic concepts of excludability (the ability to limit the consumption of the good) and rivalry (a person's consumption of the good reduces the ability of another to consume it).
Open-access property may exist because ownership has never been established, granted, by laws within a particular country, or because no effective controls are in place, or feasible, i.e., the cost of exclusivity outweighs the benefits.
— Encyclopedia of Law and Economics
Property rights theory is an exploration of how providing stakeholders with ownership of any factors of production or goods, not just land, will increase the efficiency of an economy as the gains from providing the rights exceed the costs. [19] A widely accepted explanation is that well-enforced property rights provide incentives for individuals to participate in economic activities, such as investment, innovation and trade, which lead to a more efficient market. [20] Implicit or explicit property rights can be created through government regulation in the market, either through prescriptive command and control approaches (e.g. limits on input/output/discharge quantities, specified processes/equipment, audits) or by market-based instruments (e.g. taxes, transferable permits or quotas), [18] and more recently through cooperative, self-regulatory, post-regulatory and reflexive law approaches. [21] In economics, depending on the level of transaction costs, various forms of property rights institutions will develop. [16] In economics, an institution is defined thusly:
"a complex of positions, roles, norms and values lodged in particular types of social structures and organising relatively stable patterns of human activity with respect to fundamental problems in producing life-sustaining resources, in reproducing individuals, and in sustaining viable societal structures within a given environment."
— Johnathon Turner, The Institutional Order
For specificity in the case of economic property rights, this is a system or structure that has value and stability. Transaction costs are the costs of defining, monitoring, and enforcing property rights. [22] [23]
Ronald Coase proposed that clearly defining and assigning property rights would resolve environmental problems by internalizing externalities and rely on incentives of private owners to conserve resources for the future. [24] He asserts transaction costs are ideally zero because they cause inefficiencies; due to those who would be allocatively efficient with the ownership being unable to afford or receiving less private benefit than they gain from it, as the transaction costs on top of the cost of purchasing and maintaining the property. [25] This is known as Coase theorem. Critics of this view argue that this assumes that it is possible to internalize all environmental benefits, that owners will have perfect information, that scale economies are manageable, transaction costs are bearable, and that legal frameworks operate efficiently. [18]
John Locke, Adam Smith, and Karl Marx are classical economists that generally recognize the importance of property rights in the process of economic development, and modern mainstream economics agree with such a recognition. [26] Locke supposed that one's labour was their own property and, consequently, property was any land maintained and sustained through one's own labour as long as there was sufficient and similar quality land to meet the needs of everyone's labour. [27] [28] Using this ideology, property in a broader sense would be taken as any good a person produced or maintains with their own labour. This was later elaborated on by Smith, who believed that the amount of labour it takes to produce a good does not provide its value but instead the labour the good commands or the value of goods people will be willing to trade for the good. [29] He felt the division of labour to produce products for others was better for the whole of society. [30] This was later critiqued by Marx. [28]
Sanford Grossman, Oliver Hart, and John Hardman Moore developed the property rights approach to the theory of the firm based on the paradigm of incomplete contracts. These authors argue that in the real world, contracts are incomplete and hence it is impossible to contractually specify what decisions will have to be taken in any conceivable state of the world. [31] [32] There will be renegotiations in the future, so parties have insufficient investment incentives (since they will only get a fraction of the investment's return in future negotiations); i.e., there is a hold-up problem. [31] [32] Hence, they argue property rights matter because they determine who has control over future decisions if no agreement will be reached. In other words, property rights determine the parties' future bargaining positions (while their bargaining powers, i.e. their fractions of the renegotiation surplus, are independent of the property rights allocation). [33] The property rights approach to the theory of the firm can thus explain pros and cons of integration in the context of private firms. Yet, it has also been applied in various other frameworks such as public good provision and privatization. [34] [35] The property rights approach has been extended in many directions. For instance, some authors have studied different bargaining solutions, [36] [37] while other authors have studied the role of asymmetric information. [38]
Three important criteria for efficiency of property rights are
(1) universality—all scarce resources are owned by someone;
(2) exclusivity—property rights are exclusive rights;
(3) transferability—to ensure that resources can be allocated from low to high yield uses
— Joseph Mahoney, Economic Foundations of Strategy, pg 109
One benefit of implementing property rights is that opportunism is discouraged, as it is harder to exploit a good protected by enforced property rights. [39] For example, a song can be easily pirated from purchased copies and, with no punishment, this form of the free-rider problem likely occurs. This causes the price mechanism to be less effective at finding the true market equilibrium and hurts the owners of the good who did not get it through opportunism. [40]
Another benefit is that the moral hazard is less likely to influence the actions of consumers, meaning they will be less likely to exploit resources unsustainably or inefficiently as property is protected. [41] This will lead to a lower group cost overall as people will not be able to exploit these resources as easily, causing less inefficiency issues. For example, if a person's car doesn't have property rights, people will be more likely to mistreat it or steal it for a drive, as there is no real repercussions for doing so.
Property rights are also believed to lower transaction costs by providing an efficient resolution for conflicts over scarce resources. [42] Empirically, using historical data of former European colonies, Acemoglu, Johnson and Robinson find substantial evidence that good economic institutions – those that provide secure property rights and equality of opportunity – lead to economic prosperity. [43]
As a nation grows the necessity for well-defined property rights grows as well. [44] This is due to the underlying assumption that within property rights other people must be present in order to have the rights over somebody else. Additionally, property rights are foundational for a capitalist system, allowing for growth and wealth creation. [45]
North, Wallis and Weingast argue that property rights originate to facilitate elites' rent-seeking activities. [46] Particularly, the legal and political systems that protect elites' claims on rent revenues form the basis of the so-called "limited access order", in which non-elites are denied access to political power and economic privileges. In a historical study of medieval England, for instance, North and Thomas find that the dramatic development of English land laws in the 13th century resulted from elites' interests in exploiting rent revenues from land ownership after a sudden rise in land price in the 12th century. In contrast, the modern "open access order", which consists of a democratic political system and a free- market economy, usually features widespread, secure and impersonal property rights. [47] Universal property rights, along with impersonal economic and political competition, downplay the role of rent-seeking and instead favor innovations and productive activities in a modern economy.
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In 2013, researchers produced an annotated bibliography on the property rights literature concerned with two principal outcomes: (a) reduction in investors risk and increase in incentives to invest, and (b) improvements in household welfare; the researchers explored the channels through which property rights affect growth and household welfare in developing countries. They found that better protection of property rights can affect several development outcomes, including better management of natural resources. [48]
Incomplete property rights allow agents with valuation lower than that of the original owners of economic value to inefficiently expropriate them distorting in this way their investment and effort exertion decisions. When instead, the state is entrusted the power to protect property, it might directly expropriate private parties if not sufficiently constrained by an efficient political process. [49] The necessity of strong protection of property for efficiency has been however criticized by a vast legal scholarship, originated from the seminal contribution by Guido Calabresi and Douglas Melamed. [50]
Calabresi and Melamed argue that in the face of transaction costs sufficiently sizeable to prevent consensual trade, legalized private expropriation in the form of, for instance, liability rules can be welfare-increasing. To elaborate, when property is fully protected, some agents with valuation higher than that of the original owners will be unable to legally acquire value because of sizable transaction costs. When the protection of property is weak instead, low-valuation potential buyers inefficiently expropriate original owners. Hence, a rise in the heterogeneity of the potential buyers' valuations makes inefficient expropriation by low-valuation potential buyers be more important from a social welfare point of view than inefficient exclusion from trade and so induces stronger property rights. Crucially, this prediction survives even after considering production and investment activities and it is consistent with a novel dataset on the rules on the acquisition of ownership through adverse possession and on the use of government takings to transfer real property from a private party to another private party prevailing in 126 jurisdictions. These data measure "horizontal property rights" and thus the extent of protection of property from "direct and indirect private takings", which are ubiquitous forms of expropriation that occur daily within the rule of law and are thus different from predation by the state and the elites, which is much less common but has been the focus of the economics literature. [50] To capture preference diversity, the author uses the contemporary genetic diversity, which is a primitive metric of the genealogical distance between populations with a common ancestor and so of the differences in characteristics transmitted across generations, such as preferences. [51] Regression analysis reveals that the protection of the original owners' property rights is the strongest where contemporary genetic diversity is the largest. Evidence from several different identification strategies suggests that this relationship is indeed causal. [51]
Environmental economics is a sub-field of economics concerned with environmental issues. It has become a widely studied subject due to growing environmental concerns in the twenty-first century. Environmental economics "undertakes theoretical or empirical studies of the economic effects of national or local environmental policies around the world. ... Particular issues include the costs and benefits of alternative environmental policies to deal with air pollution, water quality, toxic substances, solid waste, and global warming."
In economics, the free-rider problem is a type of market failure that occurs when those who benefit from resources, public goods and common pool resources do not pay for them or under-pay. Examples of such goods are public roads or public libraries or services or other goods of a communal nature. Free riders are a problem for common pool resources because they may overuse it by not paying for the good. Consequently, the common pool resource may be under-produced, overused, or degraded. Additionally, it has been shown that despite evidence that people tend to be cooperative by nature, the presence of free-riders causes cooperation to deteriorate, perpetuating the free-rider problem.
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's activity. Externalities can be considered as unpriced components that are involved in either consumer or producer market transactions. Air pollution from motor vehicles is one example. The cost of air pollution to society is not paid by either the producers or users of motorized transport to the rest of society. Water pollution from mills and factories is another example. All (water) consumers are made worse off by pollution but are not compensated by the market for this damage. A positive externality is when an individual's consumption in a market increases the well-being of others, but the individual does not charge the third party for the benefit. The third party is essentially getting a free product. An example of this might be the apartment above a bakery receiving some free heat in winter. The people who live in the apartment do not compensate the bakery for this benefit.
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick. Market failures are often associated with public goods, time-inconsistent preferences, information asymmetries, non-competitive markets, principal–agent problems, or externalities.
In economics, a transaction cost is a cost incurred when making an economic trade when participating in a market.
In economics, a public good is a good that is both non-excludable and non-rivalrous. Use by one person neither prevents access by other people, nor does it reduce availability to others. Therefore, the good can be used simultaneously by more than one person. This is in contrast to a common good, such as wild fish stocks in the ocean, which is non-excludable but rivalrous to a certain degree. If too many fish were harvested, the stocks would deplete, limiting the access of fish for others. A public good must be valuable to more than one user, otherwise, its simultaneous availability to more than one person would be economically irrelevant.
In law and economics, the Coase theorem describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem is significant because, if true, the conclusion is that it is possible for private individuals to make choices that can solve the problem of market externalities. The theorem states that if the provision of a good or service results in an externality and trade in that good or service is possible, then bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property. A key condition for this outcome is that there are sufficiently low transaction costs in the bargaining and exchange process. This 'theorem' is commonly attributed to Nobel Prize laureate Ronald Coase.
State ownership, also called public ownership or government ownership, is the ownership of an industry, asset, property, or enterprise by the national government of a country or state, or a public body representing a community, as opposed to an individual or private party. Public ownership specifically refers to industries selling goods and services to consumers and differs from public goods and government services financed out of a government's general budget. Public ownership can take place at the national, regional, local, or municipal levels of government; or can refer to non-governmental public ownership vested in autonomous public enterprises. Public ownership is one of the three major forms of property ownership, differentiated from private, collective/cooperative, and common ownership.
In economics, goods are items that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not transferable.
In economics, a good is said to be rivalrous or a rival if its consumption by one consumer prevents simultaneous consumption by other consumers, or if consumption by one party reduces the ability of another party to consume it. A good is considered non-rivalrous or non-rival if, for any level of production, the cost of providing it to a marginal (additional) individual is zero. A good is "anti-rivalrous" and "inclusive" if each person benefits more when other people consume it.
A private good is defined in economics as "an item that yields positive benefits to people" that is excludable, i.e. its owners can exercise private property rights, preventing those who have not paid for it from using the good or consuming its benefits; and rivalrous, i.e. consumption by one necessarily prevents that of another. A private good, as an economic resource is scarce, which can cause competition for it. The market demand curve for a private good is a horizontal summation of individual demand curves.
Club goods are a type of good in economics, sometimes classified as a subtype of public goods that are excludable but non-rivalrous, at least until reaching a point where congestion occurs. Often these goods exhibit high excludability, but at the same time low rivalry in consumption. Thus, club goods have essentially zero marginal costs and are generally provided by what is commonly known as natural monopolies. Furthermore, club goods have artificial scarcity. Club theory is the area of economics that studies these goods. One of the most famous provisions was published by Buchanan in 1965 "An Economic Theory of Clubs," in which he addresses the question of how the size of the group influences the voluntary provision of a public good and more fundamentally provides a theoretical structure of communal or collective ownership-consumption arrangements.
The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market. Firms are key drivers in economics, providing goods and services in return for monetary payments and rewards. Organisational structure, incentives, employee productivity, and information all influence the successful operation of a firm in the economy and within itself. As such major economic theories such as transaction cost theory, managerial economics and behavioural theory of the firm will allow for an in-depth analysis on various firm and management types.
Information economics or the economics of information is the branch of microeconomics that studies how information and information systems affect an economy and economic decisions.
In traditional usage, a global public good is a public good available on a more-or-less worldwide basis. There are many challenges to the traditional definition, which have far-reaching implications in the age of globalization.
In economics, a common-pool resource (CPR) is a type of good consisting of a natural or human-made resource system, whose size or characteristics makes it costly, but not impossible, to exclude potential beneficiaries from obtaining benefits from its use. Unlike pure public goods, common pool resources face problems of congestion or overuse, because they are subtractable. A common-pool resource typically consists of a core resource, which defines the stock variable, while providing a limited quantity of extractable fringe units, which defines the flow variable. While the core resource is to be protected or nurtured in order to allow for its continuous exploitation, the fringe units can be harvested or consumed.
In economics, excludability is the degree to which a good, service or resource can be limited to only paying customers, or conversely, the degree to which a supplier, producer or other managing body can prevent consumption of a good. In economics, a good, service or resource is broadly assigned two fundamental characteristics; a degree of excludability and a degree of rivalry.
New Institutional Economics (NIE) is an economic perspective that attempts to extend economics by focusing on the institutions that underlie economic activity and with analysis beyond earlier institutional economics and neoclassical economics.
Public economics(or economics of the public sector) is the study of government policy through the lens of economic efficiency and equity. Public economics builds on the theory of welfare economics and is ultimately used as a tool to improve social welfare. Welfare can be defined in terms of well-being, prosperity, and overall state of being.
In economics, a government-granted monopoly is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement. As a form of coercive monopoly, government-granted monopoly is contrasted with an unregulated monopoly, wherein there is no competition but it is not forcibly excluded.
A property right is a socially enforced right to select uses of an economic good.
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