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Property Rights. Wednesday, Feb. 2. Property Rights. Bundle of entitlements defining the owner’s rights, privileges, and limitations for use of a resource (Tietenberg)

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Property Rights

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Property Rights

Wednesday, Feb. 2


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


$

Consumer surplus

P

MB

q

Q


$

MC

P

Producer surplus

q

Q


Total welfare = PS + CS

$

S

P

D

Q

q


Two roommates:

Jose wants to study, Ben wants to watch TV

$

Ben

MB of sound

Q sound


$

Jose

MB of quiet

Q quiet


For Ben: MB of sound = MC of quiet

For Jose: MB of quiet = MC of sound


$

$

Jose

MB of quiet

Ben

MB of sound

Q sound

Q quiet


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

$

MC of sound

P

MB of sound

q

Q sound


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

$

MC of sound

P

MB of sound

q

Q sound


MB and MC curves drawn as linear for simplification

$

MC of sound

P

MB of sound

q

Q sound


This is the Coase Theorem

  • 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

sound


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.

$

Jose

MB of quiet

MB’

Q quiet


$

$

Jose

MB quiet = MC sound

p0

Ben

MB of sound

q0

q1

Q sound

Q quiet


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

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

$

MB of sound

MC of sound

MB’

P

q1

q0

Q sound


$

MC

Jose has to pay Ben, transaction costs are smaller

MC’

p0

MB

q0

q1

Q sound

$

Ben has to pay Jose, transaction costs are higher

MB

MC

MB’

p0

q0 = q0

q1 > q1

q1

q0

Q sound


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