ECON2120 Lecture 3: Topic 3
L4.1 TOPIC 3: PROPERTY
TOPIC 3 PROPERTY
- What is the role of property rights?
- What are the features of property rights?
- Why is theft inefficient? Is it just a transfer from the victim to the thief?
The role of property rights
- Property rights are sanctioned behavioural relations among people that arise from the existence of
scarce goods and pertain to their use.
- Popet ights efe to a efoeale ad tadeale udle of etitleets defiig the oes
rights, privileges and limitations for the use of a resource
- The fundamental purpose of property rights, and their fundamental accomplishment, is that they
eliminate destructive competition for control of economic resources
- Property rights reduce transaction costs. If property rights are not defined, transaction costs are
high.
- Property rights arise because resources are scarce
- A major role of the law is to define property rights. Legal rules determine what bundle of rights go
with ownership of land (or other things).
- Private property rights do not conflict with human rights. They are human rights.
- Property rights define the nature of political and economic systems, and their economic
performance
- The effects of a lack of property rights:
o Effort and resources put into defending and stealing property and more disputes
o Fear of losing property deters people from enhancing its value through investment.
Removes the incentive to maintain and improve things.
o Difficult to transfer property to higher valued uses, mutually beneficial trade is foregone.
o Lack of property rights explains the lack of development in many countries and regions
o And dependable property rights – the rule of law and property respecting common law –
explain why the industrial revolution started in England .
Features of property rights
- Ownership is a collection of rights – a udle of stiks
- A resource is a private property if it has four essential attributes:
o 1. Exclusivity: The right to use the property and to exclude others from using the asset
o 2. Transferability – the right to transfer the resource to others at some mutually agreed on
price
o 3. Appropriability: Ownership of income or services from the asset, to derive and keep the
income produced from the resource
o 4. Divisibily: The owners of valuable assets should be able to partition, re-define and create
new property rights in response to changes in economic and market conditions.
o Your ownership of property is good against the world, everyone is legally obliged to respect
it
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o Many externality problems come from a lack of property rights. Establishing property rights
may solve the externality problem.
Lack of property rights: the economics of theft
- Failure of the secure private property assumption
- Why is theft inefficient? Is it just a transfer?
- No, theft has substantial welfare costs
- Stealig hat ou ouldt u is ieffiiet
- Stealing a liquid asset worth the same to owner and theft, like cash, is also inefficient.
Costs of theft:
- Resources spent by thieves (e.g. opportunity costs of their time)
- Resources spent on public prevention
- The cost of theft is the sum of the efforts invested in the activity and preventing theft. Resources
get diverted from productive uses. Resoruces are spent not creating wealth but forcibly transferring
it and in efforts to prevent that.
- The value of stolen goods may be worth much less to thief than to the victim (if was not – the thief
could offer to buy it)
- The thief may damage property in effecting theft
- These raise the costs of theft even further.
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- So theft is an example of rent-seeking: socially wasteful competition or unproductive profit-seeking
activities. It occurs when there is an opportunity for people to spend resources transferring wealth
from others to themselves
- Why count the benefits to criminals?
- So we derive from theory what acts should be crimes, rather than assume it.
Rent seeking
- Likewise, in the political process, resources are spent seeking transfers from others (the cost of
lobbying efforts in promoting and opposing the transfer).
- So the welfare deadweight loss translges from govt. policies are an under-estimate of their welfare
csot, the transfer itself (the rectangle) will be dissipated in rent-seeking costs.
- Even lump sum transfers would not be without costs if rent seeking efforts are made to get them
- Also rent seeking may be another cost of monopoly. Resources may be spent seeking, and
preventing, monopoly profits. The rectangle of monopoly profits may be dissipated in rent-seeking
activity.
5.1 PROPERTY
- What are the implications of rent-seeking for law and for the creation of private property rights?
- Was homesteading a good idea?
- Why is common property inefficient?
- Why are some species endangered, and even driven to extinction, by humanity activity?
Rent Seeking
- Likewise, in the political process, resources are spent seeking transfers from others (the cost of
lobbying efforts in promoting and opposing the transfer).
- So the welfare DW loss triangles from govt. policies are under-estimate of their welfare cost, the
transfer itself (the rectangle) will be dissipated in rent-seeking costs
- Even lump sum transfers would not be without costs if rent seeking efforts are made to get them
- Also rent seeking may be another cost of monopoly. Resources may be spent seeking, and
preventing, monopoly profits. The rectangle of monopoly profits may be dissipated in rent-seeking
activity
Rent seeking and the law
- Bilateral bargaining is a form of rent-seeking
o I am spending resources trying to get myself a larger share of the gain, and you a smaller
share
- Rent seeking is a potential large cost that we should account for in settling laws
- Litigation expenditure is an example of rent seeking
Rent seeking incentives
- The initial owners receives a rent
- The initial creation of property rights may generate rent seeking activity – expenditure of resources
to become the first owner
- E.g. homesteading.
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