Property Rights

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.

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.

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.

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.

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.

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.

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.

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.

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