CHAPTER

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

Property Rights
Set

of rights to engage in specific

activities
Also includes responsibilities
Promote mutually beneficial exchanges
when clearly defined

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Poorly Defined Property

Rights
Create

problems with resource allocation

No incentive to conserve resources
Insufficient incentive to produce
resources

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Poorly Defined Property

Rights

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Overuse of Resources with

Poorly Defined Property Rights
Example:

1800s buffalo vs. cattle

Property rights and endangered species
African

Property

elephants

rights and resource allocation

markets

depend on clearly-defined property

rights, where possible

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

The Coase Theorem

In

the absence of transactions costs, the

allocation of resources will be
independent of the assignment of
property rights.

Example:

Confectioner vs. Doctor

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

The Coase Theorem

Income

effects

individuals care who gets initial assignment

Reciprocal

nature of problem
Do property rights have to be predefined?

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Small and Large Numbers

Transactions

costs make implementation

of Pareto superior move difficult
Small numbers = low transactions costs
resources

allocated with minimal government

involvement

Large

numbers = high transactions costs

resource

allocation depends on assignment of

property rights

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Common Pool Problem

Common

ownership

All

owners have right to use resource; cannot

exclude owners
Owners have incentive to overuse resource
Solutions
Divide

commonly owned resource

Lease rights to a resource

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Government versus Private

Ownership
Private

ownership lease rights to a

resource
Government ownership access to
resource controlled by government

common pool problem does not exist

environmentalists oppose leasing rights

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Government versus Private

Ownership
Private

ownership supply and demand

determine resource allocation
Government ownership resources
allocated in proportion to political
pressure

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Government versus Private

Ownership
Under

government ownership, political

costs/ benefits to governmental decisionmakers important
Communal Ownership in Centrally
Planned Economies
Less productive than market oriented
economies
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe

Communal Ownership in
Centrally Planned Economies
Real

World Example of Value of Property

Rights
Communal farming
Centrally planned economies generally
less productive than market oriented
economies

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Incentives of Government
Managers
Public

managers have incentive to

consider their private costs/benefits
rather than public costs/benefits
Inherent efficiency problems

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Property Rights and

Entitlements

Property Rights right to engage in certain

activities
requires others refrain from violating that right
Example: free speech

Entitlements others actively provide scarce

resources to holder of the right
creates obligation on others to fulfill that
entitlement
Example: health care

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Land Use Planning: An Application

of Property Rights Theory
Property

rights and law of nuisance

Justification for zoning laws
created

to codify land use policies

specify how property in specific areas can be
used
method of protection produced by
government

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Restrictive Covenants
Contract

agreed to by all owners of land

in an area
Specifies uses of land
Private contracts, voluntary agreement

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

21st Century Land Use

Planning
Zoning

has broadened over time

Land use planning transfers property
rights from individuals to political process
Reduced the rights of property owners
Central planning of land use

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe