PROPERTY
I. INRODUCTION
THE COMMONS
Harold Demsetz, Toward a Theory of Property Rights
The concept of Role of Property Rights
How private property evolved. Bases theory on the communal property system used by Indians (share rights and use of property, cannot restrict use of property).
Problems with communal property: lack of agreement (consensus), scarcity (over consumption), inefficient externalities.
Self interest – bad result for the community, inefficient use of resources
Native Americans – At some point the value of property increased, individuals were over consuming for animals (externalities become important).
Transaction costs- Free Rider, Hold Out, Cost of Organization
The Emergence of Property Rights
Property rights developed to internalize externalities when the gains of internalization became larger than the cost of internalization.
-The demise of the fur trade had two consequences: 1. The value of furs to the Indians increased considerably. 2. As a result the scale of hunting increased sharply. Both increased the importance of the externalities associated with free hunting.
The Coalescence and Ownership of Property Rights
Communal Ownership- Right that can be exercised by all members.
Private Ownership- Community recognizes the owner’s private interest
State Ownership- State may exclude anyone from the use of a right as long as the state follows accepted political procedures for determining who may not use state-owned property.
-If a person seeks to maximize the value of his communal rights, he will tend to over hunt or over work the land b/c some of the costs of doing so are borne by others. If negotiating and policing costs are zero, the owner’s of these rights can curtail the rate at which they work the land. Communal property results in great externalities, the effects of a person’s activities on his neighbors and on subsequent generations will not be taken into account fully. Tragedy of the Commons.
-Private ownership internalizes many of the external costs of communal property. This creates an interest to utilize the resources more efficiently. He however may not realize the effects of his land use on another private owner’s land.
-The increase in the number of owners is an increase in the communality of property and leads generally to an increase in the cost of internalizing.
Externalities- Functionof transaction costs that encourage the misuse of resources. When transactions costs are sufficiently high, the external effects of using resources are unlikely to be taken into account. Exist whenever some person makes a decision without taking full account of the effects of the decision on another. Because costs fall on others, they are externalities.
Free Rider- If the effects of alternative land use necess
ut liable to neighbors for $1500 -> will not operate farm.
Invariance Proposition (strong)- In a world without transaction costs, a change in the legal rules would have no effect on the allocation of resources (e.g. imposition of liability for cattle trespass would not cause cattle-raisers to reduce size or install more fencing).
Efficiency Proposition (weak)- Regardless of initial legal entitlements, in a world of zero transactions costs individuals would bargain with one another to garner all possible gains from trade.
Bargaining and the Coase System- The structure of the law which assigns property rights and liability does not matter so long as transaction costs are nil; bargaining will result in an efficient outcome no matter who bears the burden of liability.
ACQUISITION BY DISCOVERY (OR CONQUEST?)
Johnson v. M’Intosh- Land grant from 1773-1775 to Native Americans from Indian Chief (Chief was in rightful possession of land according to Justice Marshall). Indians sold land to Johnson. 1818- ends up in court b/c M’Intosh got his land from Govt. patent (grant or conveyance by Govt.). Who has right to land?
