Holcombe 03

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CHAPTER

3

Property Rights and

Economic Efficiency

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

Randa !ocom"e

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Property RightsProperty Rights

Set of rights to engage in specificSet of rights to engage in specific

acti#itiesacti#ities

$so inc%des responsi"iities$so inc%des responsi"iities Promote m%t%ay "eneficia e&changesPromote m%t%ay "eneficia e&changes

'hen ceary defined'hen ceary defined

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Poorly Defined PropertyPoorly Defined Property

RightsRights Create pro"ems 'ith reso%rce aocationCreate pro"ems 'ith reso%rce aocation

No incenti#e to conser#e reso%rcesNo incenti#e to conser#e reso%rces

Ins%fficient incenti#e to prod%ceIns%fficient incenti#e to prod%cereso%rcesreso%rces

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Poorly Defined PropertyPoorly Defined Property

RightsRights

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Overuse of Resources withOveruse of Resources with

Poorly Defined Property RightsPoorly Defined Property Rights ExampleExample ()**+s , "%ffao #s- catte()**+s , "%ffao #s- catte

Property rights and endangered speciesProperty rights and endangered species

$frican eephants$frican eephants Property rights and reso%rce aocationProperty rights and reso%rce aocation

mar.ets depend on ceary/defined propertymar.ets depend on ceary/defined property

rights0 'here possi"erights0 'here possi"e

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The Coase TheoremThe Coase Theorem

In the a"sence of transactions costs0 theIn the a"sence of transactions costs0 the

aocation of reso%rces 'i "eaocation of reso%rces 'i "e

independent of the assignment ofindependent of the assignment of

property rights-property rights-

ExampleExample Confectioner #s- 1octorConfectioner #s- 1octor

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The Coase Theorem

Income effectsIncome effects indi#id%as care 'ho gets initia assignmentindi#id%as care 'ho gets initia assignment

Reciproca nat%re of pro"emReciproca nat%re of pro"em 1o property rights ha#e to "e predefined21o property rights ha#e to "e predefined2

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!mall and "arge #um$ers!mall and "arge #um$ers

Transactions costs ma.e impementationTransactions costs ma.e impementation

of Pareto s%perior mo#e diffic%tof Pareto s%perior mo#e diffic%t

Sma n%m"ers 3 o' transactions costsSma n%m"ers 3 o' transactions costs reso%rces aocated 'ith minima go#ernmentreso%rces aocated 'ith minima go#ernment

in#o#ementin#o#ement

Large n%m"ers 3 high transactions costsLarge n%m"ers 3 high transactions costs reso%rce aocation depends on assignment ofreso%rce aocation depends on assignment of

property rightsproperty rights

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Common Pool Pro$lemCommon Pool Pro$lem

Common o'nershipCommon o'nership $ o'ners ha#e right to %se reso%rce4 cannot$ o'ners ha#e right to %se reso%rce4 cannot

e&c%de o'nerse&c%de o'ners

O'ners ha#e incenti#e to o#er%se reso%rceO'ners ha#e incenti#e to o#er%se reso%rce

So%tionsSo%tions 1i#ide commony o'ned reso%rce1i#ide commony o'ned reso%rce

Lease rights to a reso%rceLease rights to a reso%rce

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%overnment versus Private%overnment versus Private

OwnershipOwnership Pri#ate o'nership , ease rights to aPri#ate o'nership , ease rights to a

reso%rcereso%rce

5o#ernment o'nership , access to5o#ernment o'nership , access to

reso%rce controed "y go#ernmentreso%rce controed "y go#ernment common poo pro"em does not e&istcommon poo pro"em does not e&ist

en#ironmentaists oppose easing rightsen#ironmentaists oppose easing rights

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%overnment versus Private%overnment versus Private

OwnershipOwnership Pri#ate o'nership , s%ppy and demandPri#ate o'nership , s%ppy and demand

determine reso%rce aocationdetermine reso%rce aocation

5o#ernment o'nership , reso%rces5o#ernment o'nership , reso%rces

aocated in proportion to poiticaaocated in proportion to poitica

press%repress%re

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5o#ernment #ers%s Pri#ate5o#ernment #ers%s Pri#ate

O'nershipO'nership

Under go#ernment o'nership0 poiticaUnder go#ernment o'nership0 poitica

costs6 "enefits to go#ernmenta decision/costs6 "enefits to go#ernmenta decision/

ma.ers importantma.ers important Comm%na O'nership in CentrayComm%na O'nership in Centray

Panned EconomiesPanned Economies

Less prod%cti#e than mar.et orientedLess prod%cti#e than mar.et orientedeconomieseconomies

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Communal Ownership inCommunal Ownership in

Centrally Planned EconomiesCentrally Planned Economies Rea 7ord E&ampe of 8a%e of PropertyRea 7ord E&ampe of 8a%e of Property

RightsRights

Comm%na farmingComm%na farming

Centray panned economies generayCentray panned economies generay

ess prod%cti#e than mar.et orientedess prod%cti#e than mar.et oriented

economieseconomies

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&ncentives of %overnment&ncentives of %overnment

'anagers'anagers P%"ic managers ha#e incenti#e toP%"ic managers ha#e incenti#e to

consider their pri#ate costs6"enefitsconsider their pri#ate costs6"enefits

rather than p%"ic costs6"enefitsrather than p%"ic costs6"enefits

Inherent efficiency pro"emsInherent efficiency pro"ems

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Property Rights andProperty Rights and

EntitlementsEntitlements Property RightsProperty Rights , right to engage in certain, right to engage in certain

acti#itiesacti#ities re9%ires others refrain from #ioating that rightre9%ires others refrain from #ioating that right

ExampleExample free speechfree speech EntitementsEntitements , others acti#ey pro#ide scarce, others acti#ey pro#ide scarce

reso%rces to hoder of the rightreso%rces to hoder of the right creates o"igation on others to f%fi thatcreates o"igation on others to f%fi that

entitemententitement

ExampleExample heath careheath care

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"and (se Planning An Application"and (se Planning An Application

of Property Rights Theoryof Property Rights Theory

Property rights and a' of n%isanceProperty rights and a' of n%isance

%stification for ;oning a's%stification for ;oning a's

created to codify and %se poiciescreated to codify and %se poicies specify ho' property in specific areas can "especify ho' property in specific areas can "e

%sed%sed

method of protection prod%ced "ymethod of protection prod%ced "y

go#ernmentgo#ernment

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Restrictive CovenantsRestrictive Covenants

Contract agreed to "y a o'ners of andContract agreed to "y a o'ners of and

in an areain an area

Specifies %ses of andSpecifies %ses of and

Pri#ate contracts0 #o%ntary agreementPri#ate contracts0 #o%ntary agreement

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)*st Century "and (se)*st Century "and (se

PlanningPlanning <oning has "roadened o#er time<oning has "roadened o#er time

Land %se panning transfers propertyLand %se panning transfers property

rights from indi#id%as to poitica processrights from indi#id%as to poitica process

Red%ced the rights of property o'nersRed%ced the rights of property o'ners

Centra panning of and %seCentra panning of and %se

Holcombe 03

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