6.8 Property Rights and Market Failure

Question 1

What is the Allocation of Property Rights to Solve Tragedy of the Commons Market Failure?

Answer 1

• Issuing property rights gives the holder ownership over a piece of land, part of the sea or part of the air.
• The idea is that with private ownership there is a strong incentive to maintain the resource otherwise it will be the private owner that loses out from resource depletion or excess pollution. For example, if a wooded forest is broken up into different areas and property rights allocated to private producers, it is in each individual producer’s best interests to only cut down trees in their area that maximises their profits in the short run but does not jeopardise their profit making ability in the long run. If they over produce, the producer and their family will lose out from lost income in the future.
• Furthermore if another producer intrudes on the land of a rights holder, that holder is able to sue the trespasser thus protecting the private property they rightfully own. Consequently, any overproduction issues that existed due to no private ownership of common access resources, leading to the tragedy of the commons, is now solved with resources allocated efficiently at the socially level of output benefiting current and future generations. Sustainable production now results, dealing with the root of the problem.

Question 2

Con: it is very difficult to distribute property rights for certain things

Answer 2

The idea of property rights is excellent promoting strong incentives but in reality it very difficult to distribute property rights for the air and the sea for example. This is impractical and unrealistic given the challenge of confining part of the sea or the air to one property holder. As a consequence though the policy is theoretically sound, it has limits in its practical application where the problems of overfishing and excess air pollution will remain.

Question 3

Con: The policing of property right allocation is costly

Answer 3

The policy of property rights allocation is costly. Administration of drawing up the property rights and distributing them is costly as is the strict enforcement that is needed. There is an opportunity cost involved if surplus tax revenue does not exist. One can also question whether this is the most effective use of tax payers money particularly if an alternative policy could have been used without such cost and that would be more effective in solving the market failure. This however is a weak argument given the scale of the problem; though the policy is costly the benefits will substantially outweigh the costs and should still be used if viable.

Question 4

Con: Deciding who gets them

Answer 4

A big dilemma with the distribution of property rights is deciding who gets them. The holder has significant power as property is rightfully theirs. For example a chemical factory may want to use to a local river to dump waste into whereas villagers want to use the river to bathe and for recreational purposes. If the chemical factory receives property rights over the river, the villagers will have to agree a pay settlement to reduce the amount of waste dumped into the river, not fair considering the impact on living standards of the villagers. If the villagers receive the property rights, the factory will have to pay the villagers to use the river for dumping waste, not fair considering that production generates jobs, incomes and tax revenue in the local area. Either way one party loses out with more cost than benefit.
This issue is a normative one and is thus very difficult to solve unless the rights are held by a third party government organisation such as an environmental agency whose primary purpose is to maximise social welfare, that is the benefit of both consumers and producers.

Question 5

Eval: Governments should only go ahead with this policy is they can effectively fund enforcement

Answer 5

If the government cannot afford to properly police any trespassing or violation of property rights, individuals will know that poaching or pollution in another producer’s property is unlikely to be caught thus the policy will fail. Therefore governments should only go ahead with this policy if they can effectively fund enforcement of it otherwise they risk large scale government failure, where the cost of intervention outweighs the benefit.