Property Rights Wednesday Feb 1 Property Rights Bundle

Property Rights Wednesday, Feb. 1

Property Rights • Bundle of entitlements defining the owner’s rights, privileges, and limitations for use of a resource (Tietenberg) • Rules that specify both the proper relationships among people with respect to the use of things and the penalties for violating those proper relationships (Randall)

Non-attenuated property rights are: • Completely specified • Exclusive • Transferable • Enforceable and enforced

How is property held? Who has rights of use? • Private property • Common property • Public property • Open access (res nullius)

Coase Theorem: • When property rights are fully specified, assigned, transferable, divisible, secure and transaction costs are zero – Trade eliminates the pareto relevant externality – Resource allocation is invariant to the initial assignment of resources

$ A quick review… Consumer surplus P MB q Q

$ MC P Producer surplus q Q

Total welfare = PS + CS $ S P D q Q

Another Property Rights Parable

Two roommates: $ Jose wants to study, Ben wants to watch TV Ben MB of sound Q sound

$ Jose MB of quiet Q quiet

• What Ben is willing to accept to turn down the TV tells you how much he values sound • What Jose is willing to accept to turn up the TV tells you how much he values quiet • So – MB of sound to Ben = MC of quiet to Jose – MB of quiet to Jose = MC of sound to Ben

$ $ Ben Jose MB of sound MB of quiet Q Sound Q quiet

Jose: MB of quiet = MC of quiet $ Efficiency Ben: MB of sound = MC of sound Jose MB of quiet Ben MB of sound Q quiet

What if: $ Jose lived there first, so Ben has to bribe him in order to watch TV at an agreed upon volume MC of sound P MB of sound q Q sound

What if: $ Ben lived there first, so Jose has to bribe him in order to keep the TV at low volume MC of sound P MB of sound q Q sound

$ MB and MC curves drawn as linear for simplification MC of sound P MB of sound q Q sound

This is the Coase Theorem • When property rights are fully specified, assigned, transferable, divisible, secure and transaction costs are zero (and zero income effect) – Trade eliminates the externality – Final resource allocation is invariant to initial assignment of resources/rights sound

What if transaction costs are not zero?

Ben doesn’t speak Spanish, Jose doesn’t speak English Jose has to bribe but the marginal benefit of each additional amount of quiet is lower. $ MB’ Jose MB of quiet Q quiet

$ Jose MB quiet p 0 Ben MB of sound Q sound q 0 q 1 Q quiet

Ben doesn’t speak Spanish, Jose doesn’t speak English $ Ben has to bribe, but the marginal benefit of the same volume is lower. MB of sound MC of sound MB’ P q 1 q 0 Q sound

$ MC Jose has to pay Ben, transaction costs are smaller MC’ p 0 MB q 0 q 1 Q sound $ Ben has to pay Jose, transaction costs are higher q 0 = q 0 q 1 > q 1 MB MC MB’ p 0 Jose bears lower transaction costs so “gives up” less than Ben. q 1 q 0 Q sound