FNR 598R – AGEC 596R

Discussion points from class on Jan. 14, 2003

What is property?

Physical characteristics

• Tangible– Property that has physical substance and can be touched

• Personal

• Real

• Intangible– Right or possession of a nonphysical or abstract nature

that has value, such as a copyright, patent, license, trademark, or goodwill of a business.

– Financial asset having no intrinsic value but representing value, such securities, notes, accounts receivable, etc.

Relational characteristics

• With entity holding physical possession

• With entity holding beneficial possession

• With legal system

Incidents of Ownership• Right to use and manage• Right to the income• Right to the capital• Right to possession• Right to security• Transmissibility (alienation) subject to transactions costs• Absence of term• Prohibition of harmful use – bear cost of ownership • Residuary character• Liability to execution – rights reduced by judgment of

court

Other incidents

• What incidents don’t rise to the level of ownership?

Can incidents vary by property attribute?

Introduction to Property Rights

• Structure determines how an economy functions

• Structure evolves over time– Economic conditions– Political conditions– Non-market demands

What constitutes a property rights structure?

What is a “right”?

• P has a right to X asserts that– Others have a duty not to prevent P from doing

X– Purpose of such a duty is to promote some

interest of P’s, and– Although it is a matter of self-interest, P should

feel no embarrassment about insisting upon and enforcing this duty

• Thus, a right is a legitimate claim that one person can make against another.

A right is a legitimate claim that one person can make against another

• Relationship among member of a society– Philosophy– Sociology– Economic

• Rights are reciprocal– Correlative to duties

A right is any demand that an individual interest should be protected

or promoted, made from the individual’s own point of view, and accorded decisive moral importance.

Are property rights “agent relative”?

Our discussion will focus on so-called “third generation rights”

• Deal with communities or whole peoples– Minority language– National right to self-determination– Peace– Environmental integrity– Economic development

• First generation – traditional liberties• Second generation – socio-economic claims

Environmental quality is a “public good”

– Non-individualized goods– Hard to express the case for environmental

integrity in traditional form of rights analysis

Basis of Current Structure

• Natural rights

• English common law

• U.S. constitution

• State constitutions

Property Rights Structure

• Economic characteristics keyed to achievement of efficiency– Universality – all attributes are defined and clear lines of

ownership identified– Exclusivity – owner has exclusive rights– Enforceability – rights are enforceable– Transferability – rights can be transferred to others

• Basic types– Open access – no restriction on access– Common or community – access limited by members– Individual/Private – access limited to “owner”– Combinations – individual and community

Property Rights Structure

• May vary by component– Wildlife– Timber– Improvement– Tillage– Pasture– Movement across– Other

PR Structure Reflects Society

• Changes driven by– Social conflict and cooperation

• Rent seeking behavior

– Increase in economic efficiency• Maximize rent

– Manner of operation

• Transfers to owners who can capture more rent

PR Structure Reflects Society

• Economic conditions– Relative scarcity of attribute– Transactions costs

• Transfer of rights• Capture rent• Protection or enforcement

• Social conditions– Population level– Income– Distribution of wealth

Some Basic Conditions

• Transaction costs – associated with transfer, capture, and protection of rights

• If transaction costs are positive– Rights to assets cannot be perfectly delineated– Possibility of “wealth capture” exists in

exchanges

Some Basic Conditions

• Perfect delineation of rights requires owner and others potentially interested in the asset to possess full knowledge of all its valued properties.

Some Basic Conditions

• Divided ownership often increases wealth– Partition based on

• Transaction and production cost

• Constrain uncompensated exploitation

• Capacity to accommodate variation in income stream

Efficiency criteria

• Maximization of net value of an asset requires ownership pattern that can most effectively constrain uncompensated exploitation

History

• Monitor balance between common and private

• Use of commons– Open access

• Rent dissipated

– Restricted access• Users capture rent by voluntary use agreement• Government captures part of rent to provide

involuntary use agreement

History

• Balance determined by– Transaction costs

• Proportional to– Number of firms using the commons

– Size of commons

• Exclusion costs

– Individual units of agriculture dominate in Europe until about 8th Century

• Waste land was a commons

– Increased population led to common fields

Commons in United States

• Dominant until 20th Century

• Remains dominate on at least one-third of land

• Returning to commons on private land– Capture environmental rent

Commons for Environmental Outputs

• Regulated production on private and public lands– Rent seeking– Economic efficiency

Commons for Environmental Outputs

• Private production of environmental outputs– Voluntary output on private land

• Complementary with owner’s objectives

• Purchased specifically for this purpose

– Public acquisition• Incentive based

• Purchased at cost

Role of U.S. Constitution

• Framework for redefining property rights structure– Takings must be compensated– Takings must be for a public good

• Society defines a takings in terms of– Decrease in rent captured

Role of U.S. Constitution

• Society defines “public good” in terms of– National security

• Strategic resources

• Human capital

– Economic security• Commerce

Role of U.S. Constitution

• Public health– Environmental quality

• Air

• Water

– Social welfare– Economic welfare

• Species preservation

• Ecosystems health