Market Failure - Property Rights

Table of Contents

1. Topic pack - Microeconomics - introduction
2. 1.1 Competitive Markets: Demand and Supply
3. 1.1 Competitive Markets: Demand and Supply - notes
4. 1.1 Competitive markets - questions
5. 1.1 Competitive markets - simulations and activities
6. 1.2 Elasticities
7. 1.2 Elasticities - notes
8. Section 1.2 Elasticities - questions
9. Section 1.2 Elasticities - simulations and activities
10. 1.3 Government intervention
11. 1.3 Government Intervention - notes
12. 1.3 Government intervention - questions
13. 1.3 Government intervention - simulations and activities
14. 1.4 Market failure
15. 1.4 Market failure - notes
    1. The meaning of externalities
    2. Types of externalities
    3. How do externalities affect allocative efficiency?
    4. Negative externalities of production
    5. Negative externalities of consumption
    6. The economic theory of traffic congestion
    7. Demerit goods
    8. Government responses - demerit goods
    9. Possible government responses to externalities
    10. Direct government provision
    11. Extension of property rights
    12. Taxes and subsidies
    13. Tradeable pollution rights
    14. Regulation, legislation and direct controls
    15. Positive externalities of production
    16. Positive externalities of consumption
    17. Merit goods
    18. Why might merit goods be underprovided by the market?
    19. Government responses - merit goods
    20. Public goods
    21. Common access resources & sustainability
    22. The tragedy of the Commons
    23. Common access resources in practice
    24. Sustainability
    25. Threats to Sustainability
    26. The threat to sustainability from the use of fossil fuels
    27. The threat to sustainability from poverty
    28. Government responses to threats to sustainability
    29. Cap and Trade Schemes
    30. Promoting Clean Technologies
    31. The 'dirty side' of cleaner technologies
    32. International responses to threats to sustainability
    33. Asymmetric information
    34. Abuse of monopoly power
    35. Inequality
16. Section 1.4 Market failure - questions
17. Section 1.4 Market failure - simulations and activities
18. 1.5 Theory of the firm
19. 1.5 Theory of the firm - notes (HL only)
20. Section 1.5 Theory of the firm - questions
21. Section 1.5 Theory of the firm - simulations and activities
22. Print View

Assigning property rights

Negative externalities arise because of the existence of incomplete property rights over natural resources such as air, land, rivers and seas

Property rights concern the legal entitlement to property and the right to use or sell the property, as well as the rights that other people have, or do not have, over the property. It is argued that as property rights are not fully allocated to these resources and nobody really owns them, individuals and firms have no incentive to look after them. External costs from production and consumption activities can occur without any need to pay any compensation. The dumping of toxic wastes into the sea and the riding of a noisy motorbike provide two examples.

If property rights are allocated then owners would be able to stop others imposing costs on them or to claim compensation if they did so. A person purchasing a house, for example, could also acquire a set of 'amenity' rights that would entitle the owner to peace and quiet in the vicinity of the property as well as a supply of water and air of a reasonable quality. Any infringement of such rights e.g. by neighbours playing music unduly loudly, or trucks emitting excessive exhaust fumes into the air, would give the owner of the amenity rights entitlement to compensation. In this case the externality would be internalised as the initiators of the external costs would be forced to pay for them, and adjust their production/consumption decisions to more socially efficient levels.

However, there may be a number of problems with this solution in practice:

• for compensation to be paid, it must be possible to establish the nature and extent of external costs being imposed; in the case of most types of pollution, for example, this tends to be an extremely difficult thing to do, and so appropriate compensation levels become almost impossible to establish.
• where there are many firms or individuals imposing negative externalities, it would be exceedingly difficult to claim compensation from them all; for instance, if many juggernauts, low-flying helicopters and joy-riding teenagers passed a property, making great noise in the process, it would be somewhat impractical for the property owner to try to claim compensation from them all.
• even if those generating the external costs are few in numbers, the time and cost involved of pursuing the offenders through the courts may be prohibitive for all but the very rich; what chance would an ordinary person have, for instance, in claiming compensation from a large, multinational burger chain, which had permitted the neighbourhood to become unduly littered with burger wrappings?
• the extension of property rights has equity implications; extending private property rights is likely to favour those who already possess property at the expense of those who do not: so, Gypsies and travellers may be prevented from setting up camp, peace campaigners and other protestors could be prevented from holding their demonstrations and ramblers' rights of way in the country-side might be infringed; thus those on the political left tend to favour an extension of communal property rights and a society based more on public ownership and a set of co-operative values which, they would argue, are less likely to cause the problem of negative externalities in the first place.