Download ppt - CHAPTER 3 Property Rights and Economic Efficiency PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe

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


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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


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Poorly Defined Property Poorly Defined Property RightsRights


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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


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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


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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?


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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