DEFINITION, JUSTIFICATION AND EMERGENCE OF PROPERTY

RIGHTS
DEFINITION OF PROPERTY RIGHTS
To be precise, property rights should be defined in terms of the entailed
possessory rights and rights to transfer.
Possessory Rights allow individuals to use things and to prevent others from
using them.
Examples:
1. Right to commit a particular act
2. Right to prevent others from committing a particular act
Completely specified act includes tome, place and contingency under
which it is committed
Common Property Arrangements are agglomerations of possessory rights
1. Ownership Large collection of possessory rights (prevent others from
use of property over time and under most contingencies) subject to
certain limitations (act to be done is either harmful, proscribed, or
compelled)
2. Rental provisions large swath of possessory rights normally associated
with ownership (bar to entry to property) subject to certain exceptions
(prohibition to make major changes)
3. property arrangements in Enterprises perform office assignments and
exclude others from interfering
Rights of Transfer option of a person who holds a possessory right to give it to
another person.
Assumption: right includes subsequent order rights to transfer (right of the
recipient to transfer it to another)
Examples
1. Ownership owner usually presumed to be able to buy/sell property and
acquirer obtaining all possessory rights held by the previous owner and
transfer these rights
2. Rent/lease may/may not transfer his possessory rights to another
JUSTIFICATION FOR PROPERTY RIGHTS
Answers the questions:
Why should there be property rights? In what respect does possessory
interests in things and the ability to transfer them promote social welfare?
Provides incentives to work
* Social Welfare = Utility from consumption of good Disutility of working
1. Without property rights, optimal amount of work is not performed
Individuals would always consider that his output would be taken from
him, thus he would either,
a. Work less hours intuitive, since he would enjoy less utility from his
output (u(w)>0 and u(w)<0 means that the utility derived from
consumption of product is increasing at a decreasing rate while
d(w)>0 and d(w)>0 means that the disutility from work is increasing
at an increasing rate.)
Complications:
o whoever takes the products of others would have to consume it
and the consumption will ultimately contribute to social welfare
o Incentives to work of takers have to be examined

b. Work more hours - this occurs when a minimum amount of output to

consume is important for subsistence.
Even if output is increased, social welfare would diminish because
o High disutility of work in excess of optimal hours
Reduction in social welfare is possible WON production
rises or falls.
o Uneven distribution of products additional hours give little
additional utility.
2. Socially optimal outcome can be achieved under property rights
a. Individual has control over his own output
If individual has possessory right over his output, he would work at the
socially optimal amount of time thus maximizing social welfare
Convergence of social and individual goals
b. Supervisory entity has rights to individual output
Optimal outcome is possible if supervisor had information about
individuals work effort and possessory rights in output
Comments
In a multi-good economy with money as a medium of exchange, incentive is not
limited to consumption of own products but may include consumption of products
purchased with wages
In modern industrialized economy, motivation may come from salary and
incentive structures in supervisory settings and not entirely on consumption/sale
of products
Historically, weakening of property rights result in low productivity
Provides Incentives to Maintain and Improve Possessions
It is socially optimal to work an extra hour if utility from maintenance and
improvements exceeds the disutility of work.
expectation of continued possession of things in the future means enjoyment of
gains from maintenance and improvement
Supervisory entity may observe individual behavior and induce them to work
optimally to maintain and improve things
Comments
Possibility of future transfer optimal effort to improve durables will reflect the
future use of the new possessors as well as the present ones. Improvement is
also promoted by the right to transfer things
If durables are rented, inducement is necessary so that present possessor would
consider interest of future possessors (requirement for maintenance, obligation to
allow owner to maintain things, penalties for harm done)
Difficulties may arise if there are no owners or if monitoring of behavior may
prove to be difficult (parks, things owned in common)
Incentives to Transfer Things (transfer of goods trade)
1. Direct incentives raises the utility of those who engage in trade. Either
because they
a. Have different preferences
b. Same preferences individuals may want to consume a mix of goods
but possess only a one or few types of goods prior to trade
2. indirect allows efficient methods of production which take advantage of
specialization and of agglomerations of individuals who devote themselves to
making one or several related goods.

The transfer and trade of produced goods enables individuals to

consume different goods
Mutually beneficial trades induce people to produce things they would
not want to consume but can be traded.
If only possessory rights exist, production will be solely for personal consumption
rather than collectively organize and employ efficient production methods.
Comments
Transferability of intermediate goods (goods used to produce other goods) is
important to achieve optimality.
Under supervisory system, transfers of equipment and also of output in different
stages of production are done
When the right to transfer doesnt exist or when the supervisor does it poorly, the
outcome is not socially desirable
Crop growing under the classical usufruct encourages the intensive use
of the land
When rights to apartments are determined by assignment of social
authority, trade among tenants may occur
Avoidance of Dispute and Efforts to Protect or to Take Things
The guarantee of property rights by the state would remove the motive to take or
to protect things, and disputes
Disputes and efforts devoted to protecting things or to taking things from others
are undesirable because they may result to harm and to possible reallocating (not
production)
Without property rights, people would devote time and resources to protecting
their things.
Comments
Even when the state makes substantial effort to safeguard property, there are
still considerable incidences of theft and large sums are allocated to protecting
property.
Indirect and important costs of lack of property rights
Damage to things
Alteration of things produced by individuals in favor to those easily
protected rather than those that are most suitable
Protection Against Risk
Protection against risk is important since individuals are generally risk-averse.
Protection prevents others holdings from being stolen and also allows for
insurance an risk-sharing arrangements against a whole range of risks (nature,
market, technological uncertainties)
Achievement of Desired Distribution of Wealth
Socially optimal distribution of wealth is one that maximizes social welfare (gini
coeff close to 0)
Without property rights, allocation would be determined by the ability to take the
property of others, to protect possessions, and by chance.
Under property rights, desired distribution of wealth is achievable and state may
redistribute wealth and the new distribution will be maintained

Comments
Social welfare maximization is also concerned with the production of wealth an
efforts to redistribute wealth in order to achieve desired redistribution generally
influence incentives to produce wealth
Achievement of desired distribution of wealth is only potential because actual
distribution depends on other factors i.e. political system. The point is that
without property rights, the distribution of wealth and the amount of wealth may
deviate largely from ideal.
*arguments give above property rights, but no argument has been given to support
a specific form of property rights. The benefits may be often enjoyed under very
different property rights regimes.
Note on the Literature
Justification for property rights was discussed by Hobbes, Locke, Hume,
Blackstone and Bentham.
They stressed that tin the absence of possessory property rights,
individuals will take things from one another and disputes will arise
and the motive to work will be compromised.
They mention that trade is the consequence of the existence of
property rights rather than an aspect of their justification.
Most literature is concerned with the most desirable character of property rights
EMERGENCE OF PROPERTY RIGHTS
Expect property rights to emerge when there are no rights or when rights are
poorly established.
o Advantages of prop rights outweigh the costs of establishing
them
Property rights arise because a substantial proportion of the population recognize
that it will be better of leading to collective/individual pressures to develop them
(Note: most of the examples cited show that property rights emerged out of the
desire to allocate scarce resources)
California Gold Rush. When gold was discovered in 1848 property rights were
undetermined (reasons: territory was just being acquired from Mexico, population
was low, no authorities to enforce the law). In time, the area was divided into
districts with each having explicit agreements regarding property rights (land
assignments and redress in case of theft). The reasons for the arrangements are (1)
to encourage individuals to expend effort and make investments, (2) to prevent
violence and (3) to reduce need to spend individual effort to protect land
Fur Trade on Labrador Peninsula. Prior the fur trade, Indians only got fur for their
personal use, thus there was no danger of depletion of the animal stock and no need
for property rights. However, the expansion of fur trade made it necessary to
establish a system of property rights (marking off of territory and retaliation against
trespassers) to prevent the overly intensive hunting of fur bearing animals and to
encourage the Indians to husband their animals to have a larger stock

Rights to the Resources of the Sea. Introduction of trawler fleets, increased scale
of, and modern methods employed in, fishing made it necessary for countries to
establish property rights in fish found in their coastal waters (exclusive economic
zones). This provides an incentive for countries to preserve the resources.
Likewise, property rights for oil and minerals in the seabed provide motive to
explore, develop technology for extraction and to exploit oil and mineral
resources.
Rights to the Electormagnetic Spectrum. The electromagnetic spectrum
(medium through which electronic magnetic signals travel) became valuable with
the invention of the radio and wireless communication that property rights to allocate
exclusive rights to broadcast over particular ranges at particular times emerged.
These rights are in the form of licenses of limited duration which may be renewed.
Lotteries and auctions are being used to allocate rights where these rights have
limited transferability.
Rights to extraterrestrial bodies and outer space. The moon treaty commits
the signatories to establish and international regime to govern the use of resources
of the moon but postpones the allocation of property rights. Property rights to the
geostationary orbit (band of space 22,300 miles above the equator where satellites
travel at same speed as the earths rotation) are being discussed and even claimed.