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Understanding Property Rights: Concepts, Implications, and Coase Theorem

This text explores the intricate nature of property rights, detailing the bundle of entitlements that define owners' rights, privileges, and limitations regarding resource use. Key notions include the types of property—private, common, public, and open access—as well as the Coase Theorem, which highlights the significance of well-specified, transferable, and enforceable property rights in efficient resource allocation. Through practical examples involving roommates, it illustrates how individual valuations of quiet and sound can shape property negotiations and outcomes.

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Understanding Property Rights: Concepts, Implications, and Coase Theorem

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  1. Property Rights Wednesday, Feb. 1

  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)

  3. Non-attenuated property rights are: • Completely specified • Exclusive • Transferable • Enforceable and enforced

  4. How is property held?Who has rights of use? • Private property • Common property • Public property • Open access (res nullius)

  5. 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

  6. A quick review… $ Consumer surplus P MB q Q

  7. $ MC P Producer surplus q Q

  8. Total welfare = PS + CS $ S P D Q q

  9. Another Property Rights Parable

  10. Two roommates: Jose wants to study, Ben wants to watch TV $ Ben MB of sound Q sound

  11. $ Jose MB of quiet Q quiet

  12. What Ben is willing to accept to turn down the TV tells you how much he values sound • What Jose is willing to accept to turn up the TV tells you how much he values quiet • So • MB of sound to Ben = MC of quiet to Jose • MB of quiet to Jose = MC of sound to Ben

  13. $ $ Ben MB of sound Jose MB of quiet Q quiet Q Sound

  14. Jose: MB of quiet = MC of quiet Ben: MB of sound = MC of sound Efficiency $ $ Jose MB of quiet Ben MB of sound Q sound Q quiet

  15. What if: 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

  16. What if: 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

  17. MB and MC curves drawn as linear for simplification $ MC of sound P MB of sound q Q sound

  18. 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

  19. What if transaction costs are not zero?

  20. 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

  21. $ $ Jose MB quiet p0 Ben MB of sound q0 q1 Q sound Q quiet

  22. 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

  23. $ 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’ q0 = q0 q1 > q1 p0 Jose bears lower transaction costs so “gives up” less than Ben. q1 q0 Q sound

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