Econ 132, Public Finance, Foldvary

Holcombe, Chapter 3

Property Rights and Economic Efficiency

Property is anything that can be controlled.

Ownership is a bundle of rights to property.

Government holds some of the rights, e.g. zoning, taxes.

Houston TX has no zoning; covenants instead.

Historically, cities have grown rapidly and in an orderly manner

without any visible hand to control the development.

Great Britain became the world's first urbanized population by 1851,

with an unprecedented growth of its cities,

without any centralized urban planning or land-use controls

until the Housing and Town Planning Act of 1909.

The urban growth was "directed by property rights and private contracts,

and shaped and determined by market forces"

There were no housing shortages, and the poor were provided with affordable housing. Infrastructure was provided by the landlord or the developer.

Covenants were used to coordinate and allocate land-use rights, thus preventing offensive uses. Prescriptive covenants specified the types of materials used and the heights of the buildings.

The absence of governmental planning was therefore not a chaos of disorder,

but a decentralized profit-incentivized contract-based order

that was simultaneously spontaneous and organizational.

The only role of the government was to enforce the contracts.

Common resources

Common ownership: anyone may use and take, with no charge.

For common resources, there can be externalities.

Well delineated and enforced property rights prevent externalities.

Regulations can create perverse incentives, e.g. endangered species.

Coase theorem - Ronald Coase

With low transaction cost, parties will achieve an efficient outcome to an externality issue.

Regardless of which party has the property rights.

The classic example, steam-powered train that throws off sparks

on fields of crops that catch fire.

The Coase theorem: negotiation will achieve the efficient outcome,

regardless of the assignment of property rights.

But if there are high transaction costs, then negotiation will not be effective.

Also, pollution as a nuisance, could be subject to lawsuits, although now regulation precludes it.

With high transaction costs, as with large populations,

government can act as the agent of the people to obtain compensation.

Common pool: e.g. liquid or gas resources.

There can be overuse if not managed.

Owners of a liquid pool can create a joint organization.

Government ownership usually refers to exclusive use by government agents.

Government officials and bureaucrats have their own self-interest.

Example of first-class air travel.

Entitlements - legal rights to resources paid for by others.

Children have entitlements because parents have a responsibility.

What about adults?

Welfare-state advocates claim there is a right to food, medicine, housing - paid for by others.

Why is there poverty: market or intervention?

If intervention causes poverty, welfare to the poor can be considered compensation

for the denial of economic opportunity.

p. 67 p. 10. What are the proper and optimal rights and entitlements?