Property Rights

Imagine you were living in an area where the production of a factory contaminates the water you drink. The company has property rights to the land, so it does not really care if it contaminates the water or not. But what if drinking drinkable and uncontaminated water were considered a property right for you? Then the company would really care whether it contaminates the water or not.

Property Rights Property Rights

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Table of contents

    Property rights are laws that specify what one can do with their property. Property rights can help solve environmental problems as well as boost economies. Why don't you read on and learn more about property rights, their types and characteristics, and how we all benefit from them?

    Property Rights Definition

    Property rights refer to a set of laws that specify what individuals or businesses are permitted to do with their property. If you are someone who owns a piece of land, property rights allow you to sell the land and build on it—additionally, property rights restrain others from doing anything with your land without your permission.

    Property rights are a set of laws that specify what an individual or business can do with their property.

    Rules and regulations that the government clearly outlined will actively enforce and protect individual or business property rights. In addition to specifying and defining ownership of the property, these rules and regulations protect any benefit associated with being a legal owner of the property.

    For example, if you own an apartment and want to rent it out, property rights rules and regulations ensure you receive the monthly income from renting out your apartment.

    It is important to note that the word property may refer to a wide variety of things. When we refer to property, it is not only real estate property or a car, but it also includes a patent an individual might have on an invention. However, the degree of legal protection for different types of property rights can differ significantly across nations.

    In countries where the government has a legal environment that provides and enforces property rights, individuals can acquire property rights only through mutually agreed-upon transactions.

    For example, when one voluntarily shares their inheritance or donates to charity, the receiver of the inheritance or the charity donation becomes the owner of these properties only when both parties agree.

    Additionally, when selling a house, the other individual becomes the owner of the property right when both parties mutually agree upon the transaction.

    However, if the owner of a rental property rents it to a tenant, the property owner still retains the property rights, even though the tenant is occupying the space.

    On the other hand, some governments provide limited to no property rights to their citizens. In such regime systems, the ownership of resources and the ability to utilize them are often distributed coercively by the government in countries and regions where private property rights do not exist.

    The governments of these countries decide who may engage with, be excluded from, or profit from the use of the property.

    In the absence of property rights, economic resources are not allocated as efficiently, which leads to several negative externalities that harm individuals and businesses.

    Property Rights Externalities

    Each business transaction has some property rights externalities.

    Externalities are external negative or positive effects a company or an individual causes to other parties as a result of their own activity.

    For example, if you live by a factory whose production contaminated water, the business activity of the company is causing a negative externality on you. That's because it is polluting the water you drink, which risks causing you diseases.

    When the government clearly defines the property rights of all parties, negative and positive externalities are distributed more efficiently. However, it is required to be a measurable economic impact caused by the individual or the business to be considered an externality.

    Fossil fuel power stations are a significant source of industrial wastewater, releasing poisonous and reactive substances. Without suitable treatment and management procedures, dumping waste into water bodies might have health repercussions. This causes negative externalities in the surrounding area and to individuals who live there.

    Property rights allow fossil fuel power stations to continue conducting their business activity. But what about the individuals who live in the surrounding area?

    Well, in a regime where property rights are clearly defined and comprehensive, meaning that they consider the negative cost the individuals incur due to the fossil-fuel power station, drinkable water would be regarded as a property right. That is to say that while the fossil-fuel power station has its own property right to conduct business, individuals also have the property right to drink uncontaminated water.

    In such a case, the government forces the company to conduct water management in a way that limits water contamination. The company will be facing an additional cost for lowering water contamination. The extra cost to the company is roughly equivalent to the cost individuals face due to water contamination.

    On the other hand, if individuals living in the surrounding area of the fossil-fuel power plant did not have drinking water as a property right, then the entire negative externality of the company's property right to conduct business would fall upon the individuals.

    • The absence of clearly defined property rights for some resources may give rise to both positive and negative externalities. In other words, a transaction may only impart a benefit or impose a cost on other parties without compensating them if the rights to particular resources have not been determined. This is the only circumstance in which this is possible.

    For instance, the right to breathe clean air has not been well defined, which results in the external costs imposed by automobile emissions.

    Property Rights Externalities: Solutions

    Individuals or businesses subject to property rights externalities can limit those externalities via bargaining or suing for damages. Figure 1 shows two main solutions to property rights externalities.

    Bargaining

    Individuals or businesses subject to negative property rights externalities can bargain and negotiate a solution with the property right owner. They can agree to partial compensation for the cost that the negative externality is causing. For the solution of bargaining to be efficient, the negotiation process should not be costly.

    In situations when parties can negotiate without incurring costs and to their mutual benefit, the resultant solution will be efficient, independent of how the property rights are described.

    However, negotiating may be time-consuming and expensive, particularly in situations where property rights are not clearly established. Additionally, when there are many parties involved that are affected by property rights externalities, the process of negotiating becomes even harder.

    Suing for damage

    When one party causes negative externalities to another, the affected party has the legal right to file a lawsuit against the party that caused the negative externality.

    If the victim's claim is upheld in court, they are eligible to receive monetary compensation for their costs.

    Importance of Property Rights

    Property rights are high in importance because they ensure that resources are allocated efficiently in the economy and negative externalities that harm individuals and other businesses are limited.

    The free market does not guarantee that the air we breathe is healthy or that the water we drink isn't contaminated. Instead, societies trust their governments to safeguard the natural world and put in place rules and regulations that protect individuals from negative externalities of property rights.

    When the water is contaminated or the air we breathe is unhealthy, that's because the market cannot allocate resources because property rights are not sufficiently developed effectively.

    By having the government establish property rights that ensure that water is clean and everyone has air quality, the government is able to prevent many of the side effects of air pollution and water contamination.

    One such example could be the sale of pollution permits, which would incentivize companies to reduce air pollution to the fullest extent possible. That's because air pollution would come at a cost for the firm.

    As a result of the reduction of air pollution, the death rate would drop. More healthy individuals could provide their labor and help grow the nation's economic output. The benefit of the government selling pollution permits would be much more than the cost of it, which is a company facing more production costs.

    Property rights are essential in allocating resources in an economy much more efficiently.

    Characteristics of Property Rights

    The characteristics of property rights define an owner's rights, privileges, and constraints on resource use. Figure 2 shows the three main characteristics of property rights.

    There are three main characteristics of property rights:

    1. Exclusivity. Exclusivity ensures that the property right owner faces all the costs and benefits of owning a property right. That is to say that an owner of a property right should not cause externalities.
    2. Transferability. Transferability is another important characteristic of property rights, which allows individuals to transfer ownership to others. It is conditional on the fact that both parties must mutually agree to transfer the property right ownership.
    3. Enforceability. Enforceability ensures that the holding of property right ownership, as well as the transfer of it, is done in a legally binding manner. Property rights prevent seizure or encroachment of property by others.

    Types of Property Rights

    The main types of property rights include private property, common property, and public property.

    Private property rights grant individuals ownership of a defined property and allow them to exclude others from reaping the benefits of that property.

    A person with private property rights has the authority to prevent others from using or benefiting from the individual's property.

    An individual may refer to a single person, a group of individuals, a business, or an organization that does not benefit from its activities and may be awarded private property rights.

    Common property refers to the type of property rights that are collectively owned and administered.

    Fishing in the open ocean and grazing on public lands are two examples of this type of property right.

    Common property rules may be very contentious due to the fact that various parties will have contrasting viewpoints on the best way to administer these resources.

    Public property is also known as state property. The government is in charge of managing this kind of property, despite the fact that it belongs to all of the citizens.

    National parks are an example of a property that is owned by the state.

    Property Rights - Key takeaways

    • Property rights are a set of laws that specify what an individual or business can do with their property.
    • In countries where the government has a legal environment that provides and enforces property rights, individuals can acquire property rights only through mutually agreed-upon transactions.
    • Externalities are external negative or positive effects a company or an individual causes to other parties as a result of their own activity.
    • Private property rights grant individuals ownership of a defined property and allow them to exclude others from reaping the benefits of that property.
    Frequently Asked Questions about Property Rights

    What are property rights?

    Property rights are a set of laws that specify what an individual or business can do with their property.

    What are the types of property rights?

    The main types of property rights include private property, common property, and public property.

    What are externalities in property rights?

    Externalities in property rights are external negative or positive effects a company or an individual causes to other parties as a result of their own activity.

    How do property rights affect the economy?

    Property rights affect the economy by incentivizing individuals and businesses to invest in land and capital.

    What are the importance of property rights?

    Property rights are important because they ensure that resources are allocated efficiently in the economy and negative externalities that harm individuals and other businesses are limited.

    Test your knowledge with multiple choice flashcards

    If you are someone who owns a piece of land, property rights allow you to _______________.

    Rules and regulations that the government clearly outlined will actively enforce and protect individual or business property rights.

    Property rights allow you to rent out your friend's apartment to other friends.

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