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The Economics of Property Rights

Introduction

This chapter examines one of the most important institutions in market economies: private property rights. Private ownership of property rights over an asset typically consists of a 'bundle' of rights, which usually include:

  • 1. The right to use the asset;
  • 2. The right to exclude others from using the asset; and
  • 3. The right to dispose of the asset.

Legal rules governing private property are designed primarily to resolve conflicts between individuals who - for one reason or another - have overlapping property rights along one or more of these dimensions. This chapter examines the economics of all three features of property rights and how legal institutions and rules governing usage, exclusion and disposal can affect the efficiency of resource allocation. In particular, the analysis focuses on the broad economic issues relating to overlapping usage rights, overlapping exclusion rights, and overlapping disposal rights.

The first key insight regarding private usage and exclusion rights is the phenomenon of the twin tragedies: the tragedy of the commons, and the tragedy of the anticommons. Both overlapping usage rights and overlapping exclusion rights (as opposed to single user rights and single exclusion rights) can lead to resource misallocation and reduce economic well-being. Moreover, the extent of the economic waste increases as the number of users or excluders increases. We also show in this chapter that overlapping disposal rights can lead to similar inefficiencies.

The role of an efficient legal system is to design rules to minimise the likelihood of these phenomena occurring and, in so doing, minimise resource misallocation and economic waste, and maximise net economic benefits. However, even if individuals enjoy nonoverlapping usage, exclusion and disposal rights over an economic resource, other kinds of efficiency losses are possible. Most importantly, property rights may be ill defined and/or insecure. Insecure property rights create incentives for rent-seeking activity, which is the devotion of valuable economic resources to transferring or appropriating existing resources (and preventing such transfers and appropriation from occurring), as opposed to using resources for productive purposes and adding economic value. Empirically, in some economies the efficiency losses associated with insecure property rights may dwarf the efficiency costs associated with overlapping usage, exclusion and disposal rights.

Finally, the chapter discusses some economic aspects of intellectual property rights. In particular, we use second-best welfare analysis to analyse the optimal length of a patent, which is a temporary monopoly right over a piece of i ntellectual property. The chapter is structured as follows. Section 7.2 examines the difference between property rights and liability rules using the concept of transaction costs. Section 7.3 examines the economic costs that are associated with overlapping usage, exclusion and disposal rights to property. Section 7.4 develops a simple model of insecure property rights, and studies the economic costs that are associated with insecure title. Section 7.5 turns to the economics of intellectual property rights, illustrating some of the main issues by looking at the costs and benefits of patent law.

 
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