#11071 - Evolution Of Property Rights - Property

Utilitarian theory of Evolution of Property Rights

1. How does property arise from non-property? Non-property = tragedy of open access in which:

   1. Overuse = benefit to self, harm to others (externality)

   2. Conservation = cost to self, benefit to others

   3. Incentive to “free ride” on others’ conservation

   4. Inadequate “collective action” to conserve the resource

2. Question – How do we solve this Tragedy? What form of property should the solution take? Each provides different incentives & costs…

3. Blackstone’s Account of Evolution of Property Rights

   1. Very similar to utilitarian point of view

   2. Contrasts idea of absolute dominion with the gradual creation of property rights with social change

   3. Originally all was commons (from the Creator), all we had was temporary use rights at first

   4. Rising demand for resources

   5. Privatization to motivate production

   6. “Necessity begat Property” (scarcity begat property)

      1. Need social institution to enforce property rights, so need system of government and law

   7. First occupancy – weakest part of chapter because he neglects other ways of allocating property rights

4. Demsetz’s Account of Evolution of Property Rights (200 years later)

   1. Open-access + demand = yields overuse

   2. Overuse = externality (harm to others)

   3. Private (excludable) property would “internalize the externality” (user would have to face the cost of the loss of the resource)

      1. We privatize when the benefit of doing so (i.e., the benefit of internalizing the externality) exceeds the cost of doing so (i.e. the costs of negotiation, monitoring, enforcement – transaction costs of ensuring property rights)

         1. NE Indians – fur trade; animals territories confined to small areas, so cost of internalizing the effect of husbanding these animals is small compared to high commercial value of animals productive to establish private hunting lands.

         2. SW Indians – plains animals are not as commercially valuable, and roam, so high cost of preventing animals from moving to other tracts of land.

      2. As benefits rise, have more property

         1. Rising demand for fur pelts

         2. Higher income

         3. New uses for animals (whale oil for heating & lighting)

      3. As costs decline, have more property

         1. Better methods of communication

         2. Better methods of fencing/dividing up parcels

            1. Invention of barbed wire

            2. Tradable permits for sulfur oxide emissions (cost of reducing pollution is allocated to firm who can do so most cheaply)

            3. Transferable development rights (Penn Station case)

            4. ITQs (individual transferable quotas for how much fish can catch) – Atlantic Cod Fishery

   4. Rising demand Internalize Externalities, which kind of property systems to do this?

      1. Private Property?

      2. Communal Property/Social Norms?

The Privatization Puzzle

1. If users cannot cooperate to stop overuse of the resource (hence tragedy, hence need for privatization), how/why do they cooperate to create the legal regime?

   1. Where they are repeat players – norms which ripen into law. As opposed to sporadic players who don’t have much contact with each other

   2. Only where small close-knit group? (gets to communication)

   3. Only where benefits greatly exceed costs? (crisis triggers)

   4. Only where the new law covers many different resources – issue linkage & reciprocity (we’ll restrict my use of this if also restrict your use of that)

   5. “Legal entrepreneurs” – who sees economic and political gain from proposing a private ownership system?

   6. Power/coercion?

      1. Levmore – history of property could be (1) Demsetz model of cooperation or (2) could be coercion model – some actor will get certain parochial benefits and lobbies government (Acemoglu)

      2. Example = IP rights

         1. Result of desire to find balance between providing incentive to encourage innovation and having enough open access to build upon those inventions?

         2. Or, result of influence of publishers, biotech companies taking advantage of political process against opposing parties who are widely dispersed & not in communication (& thus disadvantaged in this process)?

The Optimal Mix of Property Rights (Ellickson, Epstein)

1. Increasing returns to scale favor group property (Epstein)

   1. Economies of scale – average cost per unit drops as scale is increased

   2. Value of wide access (e.g., public parks, city streets, ideas?)

   3. Value of community (e.g., shared kitchen)

   4. Risk pooling (e.g., as insurance against crop failure) – efficiency thesis predicts that group land ownership will be more prevalent where risks are high and group cannot employ a superior insurance mechanism (insurance markets, welfare)

   5. Technology with high fixed costs

2. Monitoring costs: depends on monitoring conduct vs. monitoring borders...