Chapter Four
Property Rights: Theories and Practice
4.1 The concept of property rights
One of the most fundamental requirements of a capitalist economic system is a strong system of
property rights. Western world have complained that “property” rights too often take precedence
over “human” rights, with the result that people are treated unequally and have unequal
opportunities. Inequality exists in any society. But the purported conflict between property rights
and human rights is a mirage. Property rights are human rights.
The definition, allocation, and protection of property rights comprise one of the most complex and
difficult sets of issues that any society has to resolve, but one that must be resolved in some fashion.
For the most part, social critics of “property” rights do not want to abolish those rights. Rather,
they want to transfer them from private ownership to government ownership. Some transfers to
public ownership (or control, which is similar) make an economy more effective. Others make it
less effective. The worst outcome by far occurs when property rights really are abolished.
A property right is the exclusive authority to determine how a resource is used, whether that
resource is owned by government or by individuals. Society approves the uses selected by the
holder of the property right with governmental administered force and with social ostracism. If the
resource is owned by the government, the agent who determines its use has to operate under a set
of rules determined by executive agencies it has charged with that role.
Private property rights have two other attributes in addition to determining the use of a resource.
One is the exclusive right to the services of the resource. Thus, for example, the owner of an
apartment with complete property rights to the apartment has the right to determine whether to rent
it out and, if so, which tenant to rent to; to live in it himself; or to use it in any other peaceful way.
That is the right to determine the use. If the owner rents out the apartment, he also has the right to
all the rental income from the property. That is the right to the services of the resources (the rent).
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Private property right includes the right to delegate, rent, or sell any portion of the rights by
exchange or gift at whatever price the owner determines (provided someone is willing to pay that
price). If I am not allowed to buy some rights from you and you therefore are not allowed to sell
rights to me, private property rights are reduced. Thus, the three basic elements of private property
are (1) exclusivity of rights to choose the use of a resource, (2) exclusivity of rights to the services
of a resource, and (3) rights to exchange the resource at mutually agreeable terms.
Property rights define the theoretical and legal ownership of resources and how they can be used.
These resources can be both tangible and intangible and can be owned by individuals, businesses,
and governments. In many countries, including the United States, individuals generally exercise
private property rights or the rights of private persons to accumulate, hold, delegate, rent, or sell
their property.
Property is secured by laws that are clearly defined and enforced by the state. These laws define
ownership (right to use, transfer, and control the resource) and any associated benefits that come
with holding the property. Ownership is enforced by individuals in positions of political or cultural
power. In economics, property rights are seen as the base for market efficiency.
Acquiring Rights to a Property
Individuals or a group of individuals acquire property right in either of three different ways. The
first way is through mutually agreed-upon transfers. This is either through sales, rents, voluntarily
sharing, inheritances, charity, or else.
The second way of acquiring property right is through homesteading. Homesteading is the unique
case; an individual may acquire a previously un-owned resource by mixing his labor with the
resource over a period of time. Examples of homesteading acts include plowing a field, carving
stone, and domesticating a wild animal.
The third way of right obtaining method is through resource and ownership allocation by forces in
areas where property rights do not exist, normally by the government. That means these resources
are allocated by political ends rather than economic ones. In such cases, governments determine
who may interact with, can be excluded from, or may benefit from the use of the property.
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Characteristics of Property Rights
According to Schlager and Ostrom (1992) there are five property rights that show the range of
entitlements.
Access: The right to enter a defined physical area and enjoy non-subtractive benefits (for
example, hike, canoe, sit in the sun).
Withdrawal: The right to obtain resource units or products of a resource system (for
example, catch fish, water).
Management: The right to regulate internal use patterns and transform the resource by
making improvements.
Exclusion: The right to determine who will have access rights and withdrawal rights, and
how those rights may be transferred.
Alienation: The right to sell or lease management and exclusion rights
The well-defined property right that possess the above rights and can leads to efficient resource
allocation has the following essential characteristics.
Exclusivity: Exclusivity ensures that the property right owner faces all the costs and benefits of
owning a property right. That is to say that an owner of a property right should not cause
externalities.
Transferability: Transferability is another important characteristic of property rights, which
allows individuals to transfer ownership to others. It is conditional on the fact that both parties
must mutually agree to transfer the property right ownership.
Enforceability: Enforceability ensures that the holding of property right ownership, as well as the
transfer of it, is done in a legally binding manner. Property rights prevent seizure or encroachment
of property by others.
Importance of Property Rights
As it stated above, property rights refer to a set of laws that specify what individuals or businesses
are permitted to do with their property. Property rights can be viewed as an attribute of an economic
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good. This attribute has three broad components, and is often referred to as a bundle of rights
which include:
right to use the good
right to earn income from the good
right to transfer the good to others, alter it, abandon it, or destroy it (the right to ownership
cessation)
If you are someone who owns a piece of land, property rights allow you to preserve, to sell the
land, and to build on It — additionally, property rights restrain others from doing anything with
your land without your permission.
Rules and regulations the government clearly outlined will actively enforce and protect individual
or business property rights. In addition to specifying and defining ownership of the property, these
rules and regulations protect any benefit associated with being a legal owner of the property.
It is important to note that the word property may refer to a wide variety of things. When we refer
to property, it is not only real estate property or a car, but it also includes a patent an individual
might have on an invention. However, the degree of legal protection for different types of property
rights can differ significantly across nations.
In countries where the government has a legal environment that provides and enforces property
rights, individuals can acquire property rights only through mutually agreed-upon transactions. For
example, when one voluntarily shares their inheritance or donates to charity, the receiver of the
inheritance or the charity donation becomes the owner of these properties only when both parties
agree. Additionally, when selling a house, the other individual becomes the owner of the property
right when both parties mutually agree upon the transaction.
On the other hand, some governments provide limited to no property rights to their citizens. In
such regime systems, the ownership of resources and the ability to utilize them are often distributed
coercively by the government in countries and regions where private property rights do not exist.
The governments of these countries decide who may engage with, be excluded from, or profit from
the use of the property.
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In the absence of property rights, economic resources are not allocated as efficiently, which leads
to several negative externalities that harm individuals, businesses, and the society as a whole. In
the analysis of free market economy, we assume that property rights are well defined market
mechanism result in efficient resource allocation based the forces of demand and supply. In reality
however, the free market does not guarantee the efficiency of resource allocation. For example,
free market mechanism cannot assure the air we breathe is healthy or the water we drink isn't
contaminated. In addition, it is also impossible to manage individuals’ behavior in using common
properties and open access properties that may result in overuse and destruction of the resources.
Defining and enforcing property rights have incentive for the society to trust their governments to
safeguard the natural world and put in place rules and regulations that protect individuals from
negative externalities of property rights. Property rights are high in importance because they ensure
that resources are allocated efficiently in the economy and negative externalities that harm
individuals and the society as a whole are limited.
When the water is contaminated or the air we breathe is unhealthy, that's because the market cannot
allocate resources because property rights are not sufficiently developed effectively. By having the
government establish property rights that ensure that water is clean and everyone has air quality,
the government is able to prevent many of the side effects of air pollution and water contamination.
One such example could be the sale of pollution permits, which would incentivize companies to
reduce air pollution to the fullest extent possible. That's because air pollution would come at a cost
for the firm. However, the absence of clearly defined property rights for some resources may give
rise to both positive and negative externalities. In other words, a transaction may only impart a
benefit or impose a cost on other parties without compensating them if the rights to particular
resources have not been determined. This is the only circumstance in which this is possible.
For instance, the right to breathe clean air has not been well defined, which results in the external
costs imposed by automobile emissions. Individuals or businesses subject to property rights
externalities can limit those externalities via bargaining or suing for damages.
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Bargaining
Individuals or businesses subject to negative property rights externalities can bargain and negotiate
a solution with the property right owner. They can agree to partial compensation for the cost that
the negative externality is causing. For the solution of bargaining to be efficient, the negotiation
process should not be costly.
In situations when parties can negotiate without incurring costs and to their mutual benefit, the
resultant solution will be efficient, independent of how the property rights are described. However,
negotiating may be time-consuming and expensive, particularly in situations where property rights
are not clearly established. Additionally, when there are many parties involved that are affected by
property rights externalities, the process of negotiating becomes even harder.
Suing for damage
When one party causes negative externalities to another, the affected party has the legal right to
file a lawsuit against the party that caused the negative externality. If the victim's claim is upheld
in court, they are eligible to receive monetary compensation for their costs.
As a result of the reduction of air pollution, the death rate would drop. More healthy individuals
could provide their labor and help grow the nation's economic output. The benefit of the
government selling pollution permits would be much more than the cost of it, which is a company
facing more production costs.
In general, private property rights are essential in defining owner's rights, privileges, and
constraints on resource use, and are one of the pillars of capitalist economies, as well as many legal
systems, and moral philosophies. Within a private property rights regime, individuals need the
ability to exclude others from the uses and benefits of their property.
All privately owned resources are rivalrous, meaning only a single user may possess the title and
legal claim to the property. Private property owners also have the exclusive right to use and benefit
from the services or products. Private property owners may exchange the resource on a voluntary
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basis. As a result, it forms the basis for all market exchanges, ensures efficiency in resource
allocation in an economy much more.
Opportunism is discouraged as it is harder to exploit a good protected by enforced property rights.
For example, a song can be easily pirated from purchased copies and, with no punishment, this
form of the free-rider problem likely occurs. This causes the price mechanism to be less effective
at finding the true market equilibrium and hurts the owners of the good who did not get it through
opportunism.
The moral hazard is less likely to influence the actions of consumers, meaning they will be less
likely to exploit resources unsustainably or inefficiently as property is protected. This will lead to
a lower group cost overall as people will not be able to exploit these resources as easily, causing
less inefficiency issues. For example, if a person's car doesn't have property rights, people will be
more likely to mistreat it or steal it for a drive, as there is no real repercussions for doing so.
Property rights are also believed to lower transaction costs by providing an efficient resolution for
conflicts over scarce resources. Empirically, using historical data of former European colonies,
Acemoglu, Johnson and Robinson find substantial evidence that good economic institutions –
those that provide secure property rights and equality of opportunity – lead to economic prosperity.
4.2 Property Right Regimes
Property rights can be categorized based on the excludability and rivalry nature of the property.
Excludability describes the characteristic regarding whether a good can be withheld from certain
consumers. In terms of the same good, rivalry describes its accessibility to competing consumers.
The combination of excludability and rivalry as parameters is reflected through various types of
property rights. Based on these natures of the property, there are four main types of property right
regimes namely private property, common property, public property, and open-access property.
Private property: private properties are properties that owned and controlled by individual
person. Private property rights therefore grant individuals ownership of a defined property and
allow them to exclude others from reaping the benefits of that property.
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An individual may refer to a single person, a group of individuals, a business, or an organization.
A person with private property rights has the authority to prevent others from using or benefiting
from the individual's property.
Common property: common properties refer to the properties or resources that owned and
administered by a group of individuals. Common property or collective property is excludable and
rivalrous. The common property rights are therefore collectively hold by joint owners. That is,
common resources are owned and administered by the collective action of the group members.
Unlike private property, common property has multiple owners, which allows for a greater ability
to manage conflicts through shared benefits and enforcement.
Common property rules may be very contentious due to the fact that various parties will have
contrasting viewpoints on the best way to administer these resources. Fishing and grazing in public
lands are the two examples of such type of property right.
Public property: public property is also known as state property and is excludable and can be
rivalrous or non-rivalrous. The government is in charge of managing this kind of property, despite
the fact that it belongs to all of the citizens. In such type of properties individuals have only the
right to use the property. National parks are an example of a property that is owned by the state.
Open-access property: open access property is owned by nobody (res nullius). It is non-
excludable, as excluding people is either impossible or prohibitively costly, and can be rivalrous
or non-rivalrous. Open-access property is not managed by anyone, and access to it is not controlled.
This is also known as a common property resource, impure public good or a common pool
resource. Examples of this can be air, water, sights, and sounds.
Open-access property may exist because ownership has never been established, granted, by laws
within a particular country, or because no effective controls are in place, or feasible, i.e., the cost
of exclusivity outweighs the benefits. As a result tragedy of common happens. Tragedy of the
commons refers to destruction or overuse of the resource due to the absence of controlling
mechanism over individuals’ behavior in using the resource. An example would be unregulated
forests as there's limited resources available and therefore rivalrous, but anyone may access these
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resources. If non-rivalrous, it would be a public good (cannot be rivalrous, no matter how much it
is used, for example, the ocean (outside of territorial borders)).
4.3 Forces of Change in Property Rights
As it discussed above, property rights explain the legal and intellectual ownership of assets and
resources and one can make use of the same. These assets and resources can be both intangible
and/or tangible in nature, and the owner can be government, individuals, and businesses.
A property can be secured only by following the set of laws and regulations that are enforced by
the government. These laws establish the rights of ownership and the kind of hold one gets on
possessing the same. 'Property' is used very expansively here and the kind of legal security that
some types of properties possess generally vary across regions and jurisdictions.
Rights over private properties are one of the most important components of a capitalist economy,
moral philosophies, and legal systems. In a regime of private property rights, individuals should
have the capability to keep others away from using their properties.
Any privately owned property or resource is prone to rivalry. This means that a single owner may
have the legal rights and claim of title over the property. Private property owners will have the
legal rights to make use and control of the property they own (right to collect, delegate, sell, rent,
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or hold their property) to their benefits. Property rights constitute the base for all market-related
exchange. Thus, owners can exchange their resources on their wish. As a result, the rights of
property allocation in a community impact the quality of the resource use.
In general, forces that causes property rights to change are:
demand driven forces which include benefits and costs associated with the existing
property right arrangement, change in resource prices, change in technology, change in
social preferences, resource utilization, and sustainability
political interest of the state or the society
resource allocation efficiency, social inclusion and welfare, and equity or distributional
factors
transaction cost, free rider problem, information asymmetry, and externalities are the main
factors that leads to change in the institution of property rights
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