In this series of entries we will consider the issues surrounding property rights.
Property is defined in the dictionary as "a thing or things belonging to someone". A right is defined as "something to which a person is entitled". When describing property rights as an economic idea, we generally define property rights as the ability to use one's properties in any manner that the owner chooses. Along with this utilization, the owner also exercises the ability to incur financial gains (or losses) based upon that usage. This utilization could further include the transference of the ownership of this property to another individual or entity, after which they can exercise these same rights.
When discussing property rights, it is normally assumed that the discussion is referring to land, also known as real property. While this type of property is of significant importance to economic theory, there are other types of property that can play roles in economics. There are other physical possessions of individuals or entities, known as personal property. When the entity owning real or personal property is a government or the public at large, we refer to it as public or community property. Finally, a type of property only recently established as being definable and of economic importance is intellectual property. Intellectual property refers to certain ideas used to define products, services, policies, or procedures that generally become the property of the organization or entity for which they’re developed rather than the individual who developed them.
Property Rights
We’ve discussed the definition of property, but to further our discussion in property rights, we need to create a more abstract view of what property is in the context of rights. For this entry and future entries, it is important to consider property as resources. Specifically, property rights are particularly concerned with scarce resources; those resources that are in limited supply and provide a positive productive use.
Armen Alchian in The Concise Encyclopedia of Economics defines property rights as the exclusive authority to determine how a resource is used. The authority could be an individual or organization, in the case of private property rights, or the authority could be a government or society at large, in the case of public property.
Since the holder of the rights to the property has the authority to determine this use, the holder also has the right to any services provided through the utilization of that resource. This is important, as it is this particular right that places the resource into the market and drives the owner to utilize the property in an economically (and by the market forces, socially) beneficial manner. Additionally, the property owner also has the right to transfer this property as he sees fit.
Government Intervention
It is necessary for governing bodies to create and enforce laws and regulations designed to explicitly define and protect property rights in order for those rights to have a positive economic impact. The certainty provided by these laws and regulations provides owners and investors with assurance that any decisions they make regarding their resources are, in fact, theirs to make, and that they’re free to seek economic benefit from their use.
Additionally, it is often necessary for regulations to be created to control use of certain resources, generally common property, in order for maximum social impact to occur or sustain a positive impact in perpetuity. Utilization of common property by one entity can affect other entities who may also utilize this common property. While it is possible for these entities to come to a mutually beneficial agreement that maximizes the total benefit to society, properly created regulation can facilitate this agreement, perhaps to an end that is even more beneficial to society.
Unfortunately, not all regulations and laws have a positive economic impact. Sometimes these regulations, such as price ceilings or rent controls, can severely lessen incentive for the property owner to utilize their resources, in this case land and buildings, in a way that the market has defined as beneficial. The holder of the rights of property controlled by some regulations may choose an alternative use for that resource as an unintended consequence. Taxes, fines, and subsidies could have the intention of controlling market prices in order to control demand and supply. However, if not closely monitored and properly constructed, these could have an unintended consequence of overuse of the scarce resource.
What would happen if there were no property rights defined?
Tragedy of the Commons
What would happen if there were no property rights defined or enforced for a specific resource?
The lack of rights to this property creates a situation where there is no incentive to maintain this resource. Failing to provide definitive rights to a resource creates a common rights structure, where any member of the society is free to utilize the resource as they wish. Those individuals who choose to utilize the resource for their personal benefit no longer feel the need or even the ability to conserve the resource in a manner that will be beneficial to them in the perpetuity.
This leads to a condition known as “Tragedy of the Commons”. Originally coined by Garrett Hardin in 1968, this term references Greek tragedy, where the players (in this case, those that are utilizing the resource under common rights) fully understand what is happening but feel helpless to prevent the eventual outcome. In economics, this means that the resource will eventually cease to exist or be usable. In the long term, this would be detrimental to the overall economy of the society, which has destroyed this resource.
An example provided by Thomas Sewell in Basic Economics is that of farming in Soviet Russia. Recall that in Soviet Russia, all resources are common resources, with no property rights being extended to individuals. Because the farmers had no individual rights to the land and the food that it produced, there was little incentive to provide sufficient levels of usable supply to those who demanded them. Therefore, it was observed by a group of American farmers that much of the food was mishandled and significant amounts of spoiled food was being shipped from the farm, something that did not happen on farms in America where the farmers, via their property rights, had significant incentive to meet market demand.
Avoiding Tragedy
When no private property rights exist and a resource is accessible to large groups, we have the perfect recipe for Tragedy of the Commons. There are a few ways in which societies and governments attempt to avoid this situation in the absence of private property rights.
Once the goals of the common good are established and the necessary process to attain that good is identified, some governments institute monitors. These monitors are put in place to observe the various milestone processes to ensure that goals are being met in order to obtain the overall good of society. Regardless of the quality of this monitor, the monitor is not only a cost to society, but also a scarce resource. Therefore, there is a cost involved that decreases the total good to society.
Another option to avoid tragedy often attempted by governments is the use of taxes, fees, and fines. By levying these upon those who use the resources, they are attempting bring the private cost of production in line with the social cost of production, thus forcing the market into social equilibrium. Alternatively, these taxes could be levied on the consumers that purchase the good, effectively moving the market price of the good to a point near the social equilibrium.
One option that is often used to avoid tragedy of the commons is the implementation and enforcement of regulations. This is especially necessary for scarce common resources on which property rights are difficult (or impossible) to apply. Once the critical sustainable level of usage is determined, regulations are put in place in order to apply constraints. These constraints are intended to control the utilization of those resources as inputs and outputs of production.
Unfortunately, government regulation and taxes suffer from a variety of problems including high cost, inflexibility, ineffectiveness, and regulatory capture (Libecap, 2009). The high costs stem from the increased need for monitoring and enforcement as well as the initial cost of research and policy creation. The laws must be all-encompassing for anyone using the resource being taxes or regulated. This inflexibility creates disparities amongst competitors using this common resource due to differing marginal costs for compliance, leading some competition to either leave the market, evade the regulations, or work to coerce the regulatory body in order to be competitive. Accordingly, the social good of society becomes even less of a concern.
Here in the Real World
While there are many theoretical examples that help describe property rights and tragedy of the commons, let’s take a look at a few modern, real world examples.
Proposed Zoning Resolution
In Rutherford County, Tennessee, rural residents are currently in a battle with the Rutherford County Regional Planning Commission over new zoning ordinances. Among these ordinances are restrictions placed upon the minimum lot sizes for new housing developments. According to the article from the Daily News Journal, the proposed ordinances would create a one home per acre restriction on rural new home development and 3 homes per acre in more urban areas. The disparity could be justified in many ways and would have to be analyzed to determine if these restrictions would be provide a greater social benefit than could be created without the restrictions.
These new restrictions directly affect the property rights of the owners who currently own the land. By enacting and enforcing these restrictions, certain aspects of property rights, specifically the right to transfer the property rights and the right to the use of the land are hindered.
Herding in Mongolia
According to this article from Al Jazeera, livestock production contributes nearly 20 percent of the GDP in Mongolia with nearly half of the country’s population depending on it. This has been sustained for centuries. However, since the late 1990s, there has been serious degradation to the common resource of grassland for grazing. At that time a change in property rights occurred, where the formerly common herds were privatized, extending rights to individual herdsman. The land remained under common rights.
This created a Tragedy of the Commons scenario, where herdsman had financial incentive to grow the size of their herds. While they may understand that doing so could create a problem for the pastures, the immediate incentive and lack of guarantee that long term incentive will exist due to other competitive herds growing was grounds for this tragedy.
In an attempt to derail this impending tragedy, Mongolia is working to create co-management groups for plots of land and then extending certain property rights to these groups. These rights are intended to create a system of responsibility for the sustainability of the land and therefore providing longer term social good.
1. What are the types of property?
a. Real, Personal, Public, Intellectual
b. Real, Imaginary, Public, Private
c. Personal, Intellectual, Formidable, Cash
d. Real, Personal, New, Intellectual
2. When property rights exist, the holder of the rights to the property can:
a. Transfer the property
b. Determine the use of the property
c. Accept services provided by that property
d. All of the above
e. None of the above
3. What is one reason that a government would impose regulations affecting property rights?
a. Push the limits of their power
b. Control what crops the farmer plants
c. Control usage of common property
d. Monitor consumption of junk food
4. Who originally developed the phrase “Tragedy of the Commons”?
a. Franklin Roosevelt
b. Garrett Hardin
c. Patty O’Furniture
d. Ronald Coase
5. Which of the following are methods for avoiding “Tragedy of the Commons” (select all that apply)?
a. Monitoring
b. Mentoring
c. Regulating
d. Taxing
e. Texting
Definition of Property
In this series of entries we will consider the issues surrounding property rights.
Property is defined in the dictionary as "a thing or things belonging to someone". A right is defined as "something to which a person is entitled". When describing property rights as an economic idea, we generally define property rights as the ability to use one's properties in any manner that the owner chooses. Along with this utilization, the owner also exercises the ability to incur financial gains (or losses) based upon that usage. This utilization could further include the transference of the ownership of this property to another individual or entity, after which they can exercise these same rights.
When discussing property rights, it is normally assumed that the discussion is referring to land, also known as real property. While this type of property is of significant importance to economic theory, there are other types of property that can play roles in economics. There are other physical possessions of individuals or entities, known as personal property. When the entity owning real or personal property is a government or the public at large, we refer to it as public or community property. Finally, a type of property only recently established as being definable and of economic importance is intellectual property. Intellectual property refers to certain ideas used to define products, services, policies, or procedures that generally become the property of the organization or entity for which they’re developed rather than the individual who developed them.
Property Rights
We’ve discussed the definition of property, but to further our discussion in property rights, we need to create a more abstract view of what property is in the context of rights. For this entry and future entries, it is important to consider property as resources. Specifically, property rights are particularly concerned with scarce resources; those resources that are in limited supply and provide a positive productive use.
Armen Alchian in The Concise Encyclopedia of Economics defines property rights as the exclusive authority to determine how a resource is used. The authority could be an individual or organization, in the case of private property rights, or the authority could be a government or society at large, in the case of public property.
Since the holder of the rights to the property has the authority to determine this use, the holder also has the right to any services provided through the utilization of that resource. This is important, as it is this particular right that places the resource into the market and drives the owner to utilize the property in an economically (and by the market forces, socially) beneficial manner. Additionally, the property owner also has the right to transfer this property as he sees fit.
Government Intervention
It is necessary for governing bodies to create and enforce laws and regulations designed to explicitly define and protect property rights in order for those rights to have a positive economic impact. The certainty provided by these laws and regulations provides owners and investors with assurance that any decisions they make regarding their resources are, in fact, theirs to make, and that they’re free to seek economic benefit from their use.
Additionally, it is often necessary for regulations to be created to control use of certain resources, generally common property, in order for maximum social impact to occur or sustain a positive impact in perpetuity. Utilization of common property by one entity can affect other entities who may also utilize this common property. While it is possible for these entities to come to a mutually beneficial agreement that maximizes the total benefit to society, properly created regulation can facilitate this agreement, perhaps to an end that is even more beneficial to society.
Unfortunately, not all regulations and laws have a positive economic impact. Sometimes these regulations, such as price ceilings or rent controls, can severely lessen incentive for the property owner to utilize their resources, in this case land and buildings, in a way that the market has defined as beneficial. The holder of the rights of property controlled by some regulations may choose an alternative use for that resource as an unintended consequence. Taxes, fines, and subsidies could have the intention of controlling market prices in order to control demand and supply. However, if not closely monitored and properly constructed, these could have an unintended consequence of overuse of the scarce resource.
What would happen if there were no property rights defined?
Tragedy of the Commons
What would happen if there were no property rights defined or enforced for a specific resource?
The lack of rights to this property creates a situation where there is no incentive to maintain this resource. Failing to provide definitive rights to a resource creates a common rights structure, where any member of the society is free to utilize the resource as they wish. Those individuals who choose to utilize the resource for their personal benefit no longer feel the need or even the ability to conserve the resource in a manner that will be beneficial to them in the perpetuity.
This leads to a condition known as “Tragedy of the Commons”. Originally coined by Garrett Hardin in 1968, this term references Greek tragedy, where the players (in this case, those that are utilizing the resource under common rights) fully understand what is happening but feel helpless to prevent the eventual outcome. In economics, this means that the resource will eventually cease to exist or be usable. In the long term, this would be detrimental to the overall economy of the society, which has destroyed this resource.
An example provided by Thomas Sewell in Basic Economics is that of farming in Soviet Russia. Recall that in Soviet Russia, all resources are common resources, with no property rights being extended to individuals. Because the farmers had no individual rights to the land and the food that it produced, there was little incentive to provide sufficient levels of usable supply to those who demanded them. Therefore, it was observed by a group of American farmers that much of the food was mishandled and significant amounts of spoiled food was being shipped from the farm, something that did not happen on farms in America where the farmers, via their property rights, had significant incentive to meet market demand.
Avoiding Tragedy
When no private property rights exist and a resource is accessible to large groups, we have the perfect recipe for Tragedy of the Commons. There are a few ways in which societies and governments attempt to avoid this situation in the absence of private property rights.
Once the goals of the common good are established and the necessary process to attain that good is identified, some governments institute monitors. These monitors are put in place to observe the various milestone processes to ensure that goals are being met in order to obtain the overall good of society. Regardless of the quality of this monitor, the monitor is not only a cost to society, but also a scarce resource. Therefore, there is a cost involved that decreases the total good to society.
Another option to avoid tragedy often attempted by governments is the use of taxes, fees, and fines. By levying these upon those who use the resources, they are attempting bring the private cost of production in line with the social cost of production, thus forcing the market into social equilibrium. Alternatively, these taxes could be levied on the consumers that purchase the good, effectively moving the market price of the good to a point near the social equilibrium.
One option that is often used to avoid tragedy of the commons is the implementation and enforcement of regulations. This is especially necessary for scarce common resources on which property rights are difficult (or impossible) to apply. Once the critical sustainable level of usage is determined, regulations are put in place in order to apply constraints. These constraints are intended to control the utilization of those resources as inputs and outputs of production.
Unfortunately, government regulation and taxes suffer from a variety of problems including high cost, inflexibility, ineffectiveness, and regulatory capture (Libecap, 2009). The high costs stem from the increased need for monitoring and enforcement as well as the initial cost of research and policy creation. The laws must be all-encompassing for anyone using the resource being taxes or regulated. This inflexibility creates disparities amongst competitors using this common resource due to differing marginal costs for compliance, leading some competition to either leave the market, evade the regulations, or work to coerce the regulatory body in order to be competitive. Accordingly, the social good of society becomes even less of a concern.
Here in the Real World
While there are many theoretical examples that help describe property rights and tragedy of the commons, let’s take a look at a few modern, real world examples.
Proposed Zoning Resolution
In Rutherford County, Tennessee, rural residents are currently in a battle with the Rutherford County Regional Planning Commission over new zoning ordinances. Among these ordinances are restrictions placed upon the minimum lot sizes for new housing developments. According to the article from the Daily News Journal, the proposed ordinances would create a one home per acre restriction on rural new home development and 3 homes per acre in more urban areas. The disparity could be justified in many ways and would have to be analyzed to determine if these restrictions would be provide a greater social benefit than could be created without the restrictions.These new restrictions directly affect the property rights of the owners who currently own the land. By enacting and enforcing these restrictions, certain aspects of property rights, specifically the right to transfer the property rights and the right to the use of the land are hindered.
Herding in Mongolia
According to this article from Al Jazeera, livestock production contributes nearly 20 percent of the GDP in Mongolia with nearly half of the country’s population depending on it. This has been sustained for centuries. However, since the late 1990s, there has been serious degradation to the common resource of grassland for grazing. At that time a change in property rights occurred, where the formerly common herds were privatized, extending rights to individual herdsman. The land remained under common rights.This created a Tragedy of the Commons scenario, where herdsman had financial incentive to grow the size of their herds. While they may understand that doing so could create a problem for the pastures, the immediate incentive and lack of guarantee that long term incentive will exist due to other competitive herds growing was grounds for this tragedy.
In an attempt to derail this impending tragedy, Mongolia is working to create co-management groups for plots of land and then extending certain property rights to these groups. These rights are intended to create a system of responsibility for the sustainability of the land and therefore providing longer term social good.
Works Cited
http://www.econlib.org/library/Enc/PropertyRights.html, Armen Alchian, The Concise Encyclopedia of Economics.
Thomas Sewell, Basic Economics, page 372
Garret Hardin, Tragedy of the Commons, 1968
Libecap, Gary D.. Australian Journal of Agricultural & Resource Economics, Jan2009, Vol. 53 Issue 1, p129-144
http://www.dnj.com/article/20111201/BUSINESS/112010320/Property-rights-meeting-set
http://www.aljazeera.com/indepth/opinion/2011/11/2011112113113301903.html
Quiz
1. What are the types of property?
a. Real, Personal, Public, Intellectual
b. Real, Imaginary, Public, Private
c. Personal, Intellectual, Formidable, Cash
d. Real, Personal, New, Intellectual
2. When property rights exist, the holder of the rights to the property can:
a. Transfer the property
b. Determine the use of the property
c. Accept services provided by that property
d. All of the above
e. None of the above
3. What is one reason that a government would impose regulations affecting property rights?
a. Push the limits of their power
b. Control what crops the farmer plants
c. Control usage of common property
d. Monitor consumption of junk food
4. Who originally developed the phrase “Tragedy of the Commons”?
a. Franklin Roosevelt
b. Garrett Hardin
c. Patty O’Furniture
d. Ronald Coase
5. Which of the following are methods for avoiding “Tragedy of the Commons” (select all that apply)?
a. Monitoring
b. Mentoring
c. Regulating
d. Taxing
e. Texting
Quiz Answers
END GRADING HERE
WEEKLY ENTRIES
1. Definition of Property
2. Property Rights
3. Structure and Government Intervention
4. Tragedy of the Commons
5. Avoiding Tragedy
6. Here in the Real World