Last Class
Takeaways from Coase I
Ronald H. Coase
(1910-2013)
Economics Nobel 1991
Externalities outside the market system of prices are a problem
Externalities can be framed as a problem of property rights
Exchange is really about property rights over goods and services, (not just the goods themselves)
Property rights can internalize externalities
Takeaways from Coase II
Ronald H. Coase
(1910-2013)
Economics Nobel 1991
"Coase Theorem": if transaction costs are low, parties will bargain to the efficient outcome regardless of who has property rights
Coase: transaction costs are high, so it matters how property rights are allocated!
Look at real world institutions
Another Classic Economic Problem
Tragedy of the commons: multiple people have unrestricted access to the same rivalrous resource
Rivalry: one use of a resource removes it from other uses
Hardin, Garett, 1968, "The Tragedy of the Commons," Science 162(3859):1243-1248
Another Classic Economic Problem
Cannot exclude others
No responsibility over outcome
Incentive to overexploit and deplete resource (before others do)
A negative externality on others
Classic Solution: Property Rights
Property rights: socially agreed upon rules that determine how resources are used
Primary right is the right to exclude others from using a rivalrous resource
Property Rights
Sir William Blackstone
(1723-1780)
"There is nothing which so generally strikes the imagination, and engages the affections of mankind, as the right of property; or that sole and despotic dominion which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe," (Book II, Chapter 1).
Blackstone, Sir William, 1765-1769, Commentaries on the Laws of England
Theories of Property Rights
A primary role of the State is to protect property rights
Are property rights absolute?
Do property rights exist prior to, or independent of, the State?
Property Rights as a Bundle
Often thought of as a bundle of rights
Wide variety of forms
Property Rights Internalize Externalities
Links ownership and responsibility
Causing arm to others' property ⟹ liability for damages
Externalities as (unenforced) property rights
"Good fences make good neighbors"
But Property Rights Are Costly
Harold Demsetz
1930-2019
"Property rights develop to internalize externalities when the gains from internalization become larger than the costs of externalization," (p.350).
Demsetz, Harold, 1967, "Towards a Theory of Property Rights," American Economic Review 57(2): 347-359
In Aggregate: Property Rights Matter
Expropriation Risk: Risk of "outright confiscation and forced nationalization" of property. This variable ranges from zero to ten where higher values are equals a lower probability of expropriation. This variable is calculated as the average from 1982 through 1997, or for specific years as needed in the tables. Source: International Country Risk Guide at http://www.countrydata.com/datasets/.
Glaesar, Edward L, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, 2004, "Do Institutions Cause Growth?" Journal of Economic Growth 9: 271-303
Extra: Interesting Property Cases I
Hinman v. Pacific Air Transport 84 F.2d 755 (9th Cir. 1936)
Extra: Interesting Property Cases II
Jacque v. SteenBerg Homes Inc. 563 N.W. 2d 154 (Wis. 1997)
Extra: Interesting Property Cases III
Fontainebleau Hotel Corp. v. Forty-Five Twenty-Five, Inc (1959) 114 So. 2d 357, 1959 Fla. App.