mmons/ Property rights

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# mmons/ Property rights - PowerPoint PPT Presentation

A safe stock that always sells for \$20 in equilibrium. Pays \$1 per year every year forever ... An optimal investor (with property rights) will invest to maximize ...

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## mmons/ Property rights

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Presentation Transcript
Tragedy of the Commons/ Property rights
• Property rights are important in order for a person or firm to efficiently use its resources
• Classic example
• Lack of property rights in a grassy field
• Total benefit of the grassy field is zero without property rights
Our example today
• Two investment options
• A safe stock that always sells for \$20 in equilibrium
• Pays \$1 per year every year forever
• Buy a 1-year-old calf today for \$100
• Able to sell at two years old
• The more calves on the grassy field, the less each will be worth at two years old
What is the return on the safe stock?
• Recall Chapter 8
• The present value of a permanent annual payment
• PV = M / r
• PV = \$20
• M = 1
• This implies that r = 0.05, or 5%
What will happen w/o property rights?
• People will buy calves as long as the return on the commons is at least 5%
• \$5 return for the \$100 investment

Equilibrium w/o property rights

What will happen w/o property rights?
• People will buy calves as long as the return on the commons is at least 5%
• \$5 return for the \$100 investment
• This is not efficient, however
• No gain versus the safe stock investment
• Similar to the no-toll situation on congestible routes
What is efficient?
• We need marginal analysis
• Find marginal income of each calf
• If marginal income is at least \$5  invest in another calf
• If marginal income is less than \$5  stop investing
Income from calves with property rights

Invest as long as marginal income is at least \$5

Income from calves with property rights

>\$5  INVEST

>\$5  INVEST

<\$5  STOP!

Invest as long as marginal income is at least \$5

What is the commons worth as a private good?
• An optimal investor (with property rights) will invest to maximize the value of commons
• Suppose that someone has \$1000 to invest
• What is each person’s willingness to pay for the commons?
• How much will be invested in:
• Stocks?
• Calves?
Investment analysis
• A person that owns the commons will buy 2 calves
• \$200 invested
• \$40 return
• Could get \$10 return on the safe stock instead
• \$30 extra in return
• Willing to pay \$600 to purchase the commons
Investment decision of the person buying the commons

\$200 in safe stocks

Total returns: \$50

Commons

\$40 for two calves

Stock returns

\$10 in payments

This is equilibrium, since any person will be indifferent between investing in the commons and in stocks

Investment decision for the commons owner
Summary: Tragedy of the Commons
• Without private ownership, use of commons leads to no gain to society, relative to safe investments
• With private ownership, the land has a positive value