Lecture 3 – Economics of property rights (session 6)
Overview of topics
Property law and the functioning of markets
Private goods and public goods
o What can be privately/publicly owned?
Remedies for the violation of property rights
Intellectual property rights
o Patents
o Copyrights
o Trademarks
Tragedy of the commons
o Example cattle breeding industry using game theory
Property law and the functioning of markets
From an economic point of view two elements of property rights are very important:
o Excludability: the law should protect property against theft, destruction, etc.;
o The ability to transfer property rights: i.e. the ability to sell, buy, lease, hire, rent, etc.
Without excludability and the ability to transfer property rights, the market system would not
work
See also Coase theorem: “[...] irrespective of the initial distribution (legal assignment) of
property rights” should be clear who owns what, otherwise private negotiations will not be
successful: transaction costs will be influenced and become high.
Private goods vs. public goods
Private goods
o Rivalry; Someone uses the private good, someone else cannot use it.
o Excludability. You can exclude others from using it.
Public goods
o Non-rivalry;
o Non-excludability.
Example: public transport, security (army, police who protect a certain city), dikes.
Why are public goods a market failure (why can’t the market produce a sufficient
amount of these goods)? Free-rider problem. The free rider problem is the burden on a
shared resource that is created by its use or overuse by people who aren't paying their
fair share (“no willingness to pay”) for it or aren't paying at all.
How to solve this problem? By subsides first; taxes second.
Implications for practice:
o Some very general rules;
o Public goods should be publicly owned (or private production subsidized) and private
goods should be privately owned;
o Compare the costs of private enforcement and exchange with the costs of public
administration and decision-making-note: according to C&U, taxation is preferred to
reshuffling property rights, as it targets inequality directly while using property law
, for redistribution relies on averages (economists may agree about the means of
achieving redistribution even if they disagree about the goals).
Classification of goods
Excludable Rivalrous Private goods
Non rivalrous Free goods (sand)
Non-excludable Rivalrous Tragedy of the
commons
Non-rivalrous Public goods
Tragedy of the commons: non-excludable, but costly to exclude others from using, BUT there is
rivalry. Deforestation example; everyone wants to use the forest for production. But if we let everyone
use the forest, we’d have a huge problem. The issue of overuse is central here.
Tragedy of the commons
Definition of the problem:
o Rivalry, but at the same time:..
o Non-excludability
Problem of overuse of commonly owned resources-ex: overfishing, overgrazing, interference
between satellites in the sky
Example cows
Game theory will explain why its a problem when you put cows on a land without regulation –
people maximizing their profits will lead to too many cows put on the land.
Possible solutions:
o Private ownership: private owners can then control access by excluding others, but
they must bear the cost of boundary maintenance
o Public ownership: regulating (restricting) access to the common resource. Three types:
Political control;
Open access;
Unanimous consent on how to use it (leads to underuse) mostly used for
nature-preservation
Efficient remedies for violation of property rights
Damages versus injunctions
o “liability rule” (contracts/torts) vs “property rule”
o Damages: ex post (backward-looking), vs..
o Property rule: ex ante (forward-looking) = injunction (meaning you violate someone’s
property rights)
See conclusions Calabresi and Melamed (presented in C&U):
o When transaction costs are high (and preclude bargaining), compensation is the
efficient remedy
Overview of topics
Property law and the functioning of markets
Private goods and public goods
o What can be privately/publicly owned?
Remedies for the violation of property rights
Intellectual property rights
o Patents
o Copyrights
o Trademarks
Tragedy of the commons
o Example cattle breeding industry using game theory
Property law and the functioning of markets
From an economic point of view two elements of property rights are very important:
o Excludability: the law should protect property against theft, destruction, etc.;
o The ability to transfer property rights: i.e. the ability to sell, buy, lease, hire, rent, etc.
Without excludability and the ability to transfer property rights, the market system would not
work
See also Coase theorem: “[...] irrespective of the initial distribution (legal assignment) of
property rights” should be clear who owns what, otherwise private negotiations will not be
successful: transaction costs will be influenced and become high.
Private goods vs. public goods
Private goods
o Rivalry; Someone uses the private good, someone else cannot use it.
o Excludability. You can exclude others from using it.
Public goods
o Non-rivalry;
o Non-excludability.
Example: public transport, security (army, police who protect a certain city), dikes.
Why are public goods a market failure (why can’t the market produce a sufficient
amount of these goods)? Free-rider problem. The free rider problem is the burden on a
shared resource that is created by its use or overuse by people who aren't paying their
fair share (“no willingness to pay”) for it or aren't paying at all.
How to solve this problem? By subsides first; taxes second.
Implications for practice:
o Some very general rules;
o Public goods should be publicly owned (or private production subsidized) and private
goods should be privately owned;
o Compare the costs of private enforcement and exchange with the costs of public
administration and decision-making-note: according to C&U, taxation is preferred to
reshuffling property rights, as it targets inequality directly while using property law
, for redistribution relies on averages (economists may agree about the means of
achieving redistribution even if they disagree about the goals).
Classification of goods
Excludable Rivalrous Private goods
Non rivalrous Free goods (sand)
Non-excludable Rivalrous Tragedy of the
commons
Non-rivalrous Public goods
Tragedy of the commons: non-excludable, but costly to exclude others from using, BUT there is
rivalry. Deforestation example; everyone wants to use the forest for production. But if we let everyone
use the forest, we’d have a huge problem. The issue of overuse is central here.
Tragedy of the commons
Definition of the problem:
o Rivalry, but at the same time:..
o Non-excludability
Problem of overuse of commonly owned resources-ex: overfishing, overgrazing, interference
between satellites in the sky
Example cows
Game theory will explain why its a problem when you put cows on a land without regulation –
people maximizing their profits will lead to too many cows put on the land.
Possible solutions:
o Private ownership: private owners can then control access by excluding others, but
they must bear the cost of boundary maintenance
o Public ownership: regulating (restricting) access to the common resource. Three types:
Political control;
Open access;
Unanimous consent on how to use it (leads to underuse) mostly used for
nature-preservation
Efficient remedies for violation of property rights
Damages versus injunctions
o “liability rule” (contracts/torts) vs “property rule”
o Damages: ex post (backward-looking), vs..
o Property rule: ex ante (forward-looking) = injunction (meaning you violate someone’s
property rights)
See conclusions Calabresi and Melamed (presented in C&U):
o When transaction costs are high (and preclude bargaining), compensation is the
efficient remedy
