Economic History of Property Rights 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 musicThese 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 Whitleys 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 Coases 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 Copernican finding but must be understood to continue.
Property rights and private ownership is an essential part of a free market. Simple day to day transactions would never be able to take place without a stable dependence on private property rights. Something as simple as typical market exchange between a buyer and seller is a complex transaction built on private property rights. It becomes exceedingly difficult for one to participate in exchange when one doesnt own any property to exchange. The same with contract law, it would be impossible to legally defend an agreement between two people without the ability to protect their right to secure a transaction involving their private property when there is no private ownership.
It is under this premise that laws and precedents are set in order to protect private property and maintain a free market. In short the workings of a free market are developed through the right to private property. Coase understood this fundamental piece of a free market, not at first might I add, Coase began his career as a socialist but slowly made the transition to more of a free market economists (Hazlett 9). Coase in his own words puts it as follows, The law of property determines who owns something, but the market determines how it will be used. Its so obvious to me that I couldnt understand the fuss.
All it says is that people will use resources in the way that produces the most value, thats all. I still think its an obvious point. You wouldnt think there was a need for a Coase Theorem. (Hazlett 3). The Coase Theorem the assignment of private property rights serve the purpose of correcting for negative externalities or the consequence of incomplete assignment of property rights.
By assigning property rights this allows a solution of efficiency through private negotiation. Unlike Coases predecessor Pigou, Coase suggests that the correct way to assign property rights is to revise legal arrangements and laws to lay out standard rules and norms. As a side note Pigou favored government intervention as a way to regulate private property while Coase would contend strongly for natural market behavior to sort out the details or in his own words, :I cant remember one (regulation) thats good. (Hazlett 6). The Coase Theorem is summed up as a private property owners working out agreement between each other in order to compensate for externalities that may have a negative effect on one or both of the partys welfare.
As long as private property ownership is protected though law and maintained by the market people, according to Coase, will be able to settle disputes over externalities through private agreements. This comes into play when discussing pollution regulations and remedies. An example of such an arrangement may occur between neighbors in a apartment complex. Say one neighbor enjoys to play video games very loudly in the early morning while another neighbor enjoys to sleep in and work evenings. The noise experienced by the second neighbor is an externality and is invading the second neighbors private property. Through negotiations an agreement is reached between the two neighbors where the noisy neighbors pay the sleepy neighbor $10 a day in order to play is video game or the other deal could be that the sleepy neighbors pays the noisy neighbor to play his video game quietly.
Either way the neighbors are paying for the private property rights of the other violated by the externality. The Coase Theorem is not without its flaws. Most debates over the Coase Theorem center around whether or not it can be applied to real life situations. It is always hard to justify a theorem that works only part of the time and only on certain situations. Here are a few of the many instances where the Coase Theorem fails: If the resource cannot be divided or segmented into separate pieces of private property.
The classic example of the is air. It is impossible to d …