4 - The economics of exclusive rights

Summary

Introduction

In this chapter we contrast the economics of exclusive and nonexclusive ownership of resources and examine the consequences of alternative sets of social rules. Section 4.2 introduces the economics of the common pool, and explains how competition among users of common property can result in a dissipation of the potential rental income from the common asset. Examples from U.S. economic history are used to explain the concept of de facto common property.

In Section 4.3, we examine the costs of assigning and enforcing exclusive rights. In fact, the establishment of exclusive rights uses up resources just as does competition for a nonexclusive asset. The transfer of public timberland to private ownership in the Pacific Northwest during the late 1800s and early 1900s is taken as an example of a relatively costly privatization process. The section ends with a demonstration (in terms of a general equilibrium model) of our inability to make positive statements about the impact on aggregate welfare of the establishment of exclusive property rights, even when the change leads to an increase in net output. The reason is that the impact depends on the true nature of individual utility functions which we do not know and cannot measure.

Section 4.4 takes the discussion beyond the dichotomy of exclusive or nonexclusive rights and examines, in light of Coase's theorem, the interplay between transaction costs and conflicting uses of resources.