Economic History Of Property Rights Essay Research

Economic History Of Property Rights Essay, Research Paper

The bases of every market are the property rights of the individuals that participate in the market. Without property rights there would be no exchange and difficult to establish contract laws. Property rights were taken for granted for much of history and are now used to establish all sorts of theories, philosophies and regulation. Two excellent examples of this are the Libertarian political party and the Coase Theorem. As for the value of these two applications of private property it is important to evaluate the practicality of them. To understand both two separate historical figure will be consulted. The first being Ludwig Von Mises and his study of Libertairnism and the second will be R. H. Coase and his Coase Theorem. Each

Stated simply the Coase Theorem is as follows,

If property rights are clear and enforceable, all economic

agents have full information regarding the situation at hand,

and transaction costs are low, then there is no need for

government intervention to correct externalities because the

economic agents themselves can bargain to achieve a Pareto optimal allocation of resources. Furthermore, the ability of

economic agents to bargain among themselves to achieve a

Pareto optimal allocation of resources does not depend on

which economic agent has the property. (Zilberman 1)

To begin with the Coase Theorem addresses the market problem of externalities, or otherwise known as the Spillover Effect. The problem of externalities occurs when a person other than the original purchaser of a specific good shares in the cost and benefits of the purchased good. A common and easy to understand example of this is the placement of a new airport near residential area. Residents receive positive effects in the form of an increase in business due to the new airport but must also deal with the negative effects of the increase in noise from the airplanes using the airport. Externalities are in short anything that effects the action or welfare of an unrelated operations or persons. With such a vague description it is easy for the dilemma of externalities to become overwhelming, fogging the really issue and before you know it there is no definition. Whitley of the University of Chicago describes the parity in these terms in order to create a more clear definition.

With this very general definition, almost everything is an

externality. For example, when a new firm enters production

and drives up prices of the factors of production used by the

industry, the firm is imposing costs on other firms. This

example, is not problematic in the discussion of competitive

equilibrium, however, because the external effect is

completely transmitted through prices. Externalities like

this, where the full external effect is captured in existing

markets, are called pecuniary externalities. These

externalities are no threat to the First Welfare Theorem and

will not be discussed here. The externalities that will be

discussed here include examples like fishing, pollution, and

loud music.These examples all had in common the fact that

there was not a market for a particular good or action and

this lack of a market is where the potential to induce

equilibrium that is not Pareto optimal comes from.

(Whitley 1)

It is Whitley.s second definition of externalities that apply to the Coase Theorem. It is this second definition that pertains directly to the issue of pollution and who is directly affected by a firms action.

With a definition of externalities in hand it is important to turn to the core issue of the Coase Theorem and that is property rights. In many cases disputes over property arise because no one owns the property in question. Even worse than property owned by no one is property owned by everyone. In that case the dispute will intensify as people try to obtain some portion larger than the other parts controlled by the other owners. In the courts these disputes are often solved by dividing up the property into privately owned sections not unlike the section off of the western territories in early United States. history also known as squatter rights. As put by Svetozar Pejovich, in a collections of economic essays on property rights, the importance of property rights in Coase.s Theorem revolves around these simple principles of property rights.

The Coase Theorem says that (I) clearly defined private

property rights are an essential requirement for resolving the

conflict of interest among individuals via market exchange,

and (II) and efficient allocation of resources is independent of

the initial assignment of property rights as long as

transaction costs are significant. (Pejovich 148)

A useful concept to keep in mind is that property rights are actually a bundle of many different rights. For example I return to my airport in a residential area for guidance. A property owner is able to control planes from flying 20 feet above their yard but will be unable to stop a plane from flying 35,000 feet above their yard. Both of these controls are considered property rights. This in and of itself is not a Co

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