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CHAPTER
3Property Rights and Economic Efficiency
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Property RightsProperty Rights
Set of rights to engage in specific Set of rights to engage in specific activitiesactivities
Also includes responsibilitiesAlso includes responsibilities Promote mutually beneficial Promote mutually beneficial
exchanges when clearly definedexchanges when clearly defined
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Poorly Defined Property Poorly Defined Property RightsRights
Create problems with resource Create problems with resource allocationallocation
No incentive to conserve resourcesNo incentive to conserve resources Insufficient incentive to produce Insufficient incentive to produce
resourcesresources
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Poorly Defined Property Poorly Defined Property RightsRights
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Overuse of Resources with Overuse of Resources with Poorly Defined Property Poorly Defined Property
RightsRights Example: Example: 1800’s – buffalo vs. cattle1800’s – buffalo vs. cattle Property rights and endangered Property rights and endangered
speciesspecies African elephantsAfrican elephants
Property rights and resource Property rights and resource allocationallocation markets depend on clearly-defined markets depend on clearly-defined
property rights, where possibleproperty rights, where possible
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
The Coase TheoremThe Coase Theorem
In the absence of transactions costs, In the absence of transactions costs, the allocation of resources will be the allocation of resources will be independent of the assignment of independent of the assignment of property rights.property rights.
Example:Example: Confectioner vs. Doctor Confectioner vs. Doctor
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
The Coase Theorem
Income effectsIncome effects individuals care who gets initial individuals care who gets initial
assignmentassignment Reciprocal nature of problemReciprocal nature of problem Do property rights have to be Do property rights have to be
predefined?predefined?
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Small and Large Small and Large NumbersNumbers
Transactions costs make implementation Transactions costs make implementation of Pareto superior move difficultof Pareto superior move difficult
Small numbers = low transactions costsSmall numbers = low transactions costs resources allocated with minimal government resources allocated with minimal government
involvementinvolvement Large numbers = high transactions costsLarge numbers = high transactions costs
resource allocation depends on assignment of resource allocation depends on assignment of property rightsproperty rights
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Common Pool ProblemCommon Pool Problem
Common ownership Common ownership All owners have right to use resource; All owners have right to use resource;
cannot exclude ownerscannot exclude owners Owners have incentive to overuse Owners have incentive to overuse
resourceresource SolutionsSolutions
Divide commonly owned resourceDivide commonly owned resource Lease rights to a resourceLease rights to a resource
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Government versus Government versus Private OwnershipPrivate Ownership
Private ownership – lease rights to a Private ownership – lease rights to a resourceresource
Government ownership – access to Government ownership – access to resource controlled by governmentresource controlled by government common pool problem does not existcommon pool problem does not exist environmentalists oppose leasing rightsenvironmentalists oppose leasing rights
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Government versus Government versus Private OwnershipPrivate Ownership
Private ownership – supply and Private ownership – supply and demand determine resource demand determine resource allocationallocation
Government ownership – resources Government ownership – resources allocated in proportion to political allocated in proportion to political pressurepressure
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Government versus Private Government versus Private OwnershipOwnership
Under government ownership, Under government ownership, political costs/ benefits to political costs/ benefits to governmental decision-makers governmental decision-makers importantimportant
Communal Ownership in Centrally Communal Ownership in Centrally Planned EconomiesPlanned Economies
Less productive than market oriented Less productive than market oriented economieseconomies
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Communal Ownership in Communal Ownership in Centrally Planned Centrally Planned
EconomiesEconomies Real World Example of Value of Real World Example of Value of
Property RightsProperty Rights Communal farmingCommunal farming Centrally planned economies Centrally planned economies
generally less productive than generally less productive than market oriented economiesmarket oriented economies
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Incentives of Incentives of Government ManagersGovernment Managers
Public managers have incentive to Public managers have incentive to consider their private costs/benefits consider their private costs/benefits rather than public costs/benefitsrather than public costs/benefits
Inherent efficiency problemsInherent efficiency problems
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Property Rights and Property Rights and EntitlementsEntitlements
Property RightsProperty Rights – right to engage in certain – right to engage in certain activitiesactivities requires others refrain from violating that rightrequires others refrain from violating that right Example:Example: free speech free speech
EntitlementsEntitlements – others actively provide – others actively provide scarce resources to holder of the rightscarce resources to holder of the right creates obligation on others to fulfill that creates obligation on others to fulfill that
entitlemententitlement Example:Example: health care health care
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Land Use Planning: An Land Use Planning: An Application of Property Application of Property
Rights TheoryRights Theory Property rights and law of nuisanceProperty rights and law of nuisance Justification for zoning lawsJustification for zoning laws
created to codify land use policiescreated to codify land use policies specify how property in specific areas specify how property in specific areas
can be usedcan be used method of protection produced by method of protection produced by
government government
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Restrictive CovenantsRestrictive Covenants
Contract agreed to by all owners of Contract agreed to by all owners of land in an arealand in an area
Specifies uses of landSpecifies uses of land Private contracts, voluntary Private contracts, voluntary
agreementagreement
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
21st Century Land Use 21st Century Land Use PlanningPlanning
Zoning has broadened over timeZoning has broadened over time Land use planning transfers property Land use planning transfers property
rights from individuals to political rights from individuals to political processprocess
Reduced the rights of property Reduced the rights of property ownersowners
Central planning of land useCentral planning of land use