Property rights Flashcards

1
Q

Using an example, explain how people don’t fully take into account how their actions affect others when property rights aren’t set up correctly.

A

Imagine 2 pieces of land

1) Privately owned 2)Wilderness - free for everyone

If you wish to dump rubbish on the private land you must pay the owner but if you dump rubbish in the wild its free.

Natrurally, the difference in property rights leads to more dumping in the wilderness as this involves lower peronal costs. However, this decision creates lots of costs for others i.e. what could have became a nice park now is a big eye-sore and so bad property rights leads to bad outcomes.

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2
Q

How do markets achieve socially optimal outcomes?

A

Markets achieve socially optimal outcomes by taking into account all the costs and benefits involved in any activity, regardless of who feels the effects of those costs and benefits.

Remember: the d curve captures all benefits, the s curve captures all costs and the market equilibrium ensures that only units of output for which benefits exceed costs are produced.

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3
Q

Give an example of how property rights give owners control over their property.

A

You can paint your car any colour you want. You can modify the engine or the exhaust. You can install a sound system etc

However, property rights aren’t totally unlimited. Society does restrict what you can do to your car i.e. it must undergo an MOT, you can’t drive it too fast etc

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4
Q

What is an externality?

A

An externality is a cost or a benefit that falls not on the person(s) directly involved in an activity, but on others. Externalities can be positive or neagtive.

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5
Q

Give an example of a positive externality.

A

This a BENEFIT that falls on a person not directly involved in an activity. Think of A beekeeper. She raises bees in order to sell their honey to customers to pay for her house. But they also fly around pollinating flowers for local farmers, thereby increasing their crop yields and providing them with a postive externaltiy.

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6
Q

Give an example of a negative externaltiy.

A

This is a COST that falls on a person not directly involved in an activity. Think of a steel mill that, as a by-product of producing steel, puts out lots of soot and smoke. The pollution is a negative externality that causes smog and pollutes the air breathed by everyone living near the factory.

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7
Q

What is the key thing to understand about negative externalities?

A

The key thing is to understand about negative externalities is that goods and services that impose negative externalities on third parties end up being overproduced.

This overproduction happens because negative externalties and the costs that they impose on others aren’t taken into account when people make decisions about how much to produce.

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8
Q

What situation causes the managers of the steel mill to only take account of their private costs of raw materials and running the plant?

A

This situation arises only because a poor property rights regime is in place.

If someone owned the atmosphere, the mill’s managers would have to pay for the right to emit pollution.

But because no mechanism is in place for making the managers pay for the costs of pollution the result is that the firm overproduces steel.

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9
Q

Why does overproduction (of steel) happen?

A

Rememeber: a competitive firms’s supply curve = its MC curve.

Because the mill doesn’t take into account the MC’s that its production of steel imposes on others, its MC curve (supply curve) is too low and leads to an overproduction of steel.

Compare the firms PRIVATE MC curve with the SOCIAL MC curve below.

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10
Q

What is the Social MC CURVE?

A

It captures all costs associated with producing steel - both the firm’s cost of making it and the costs imposed on others as negative externalities.

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11
Q

What is the problem with producing all the units from qsoc to qm?

A

The problem with producing those units is that although the benefits do exceed the FIRMS’S private production costs, they don’t exceed the total costs when you take into account XC = the cost of the negative externality.

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12
Q

Why is the output level produced in a market economy (aka qm) unfortunate?

A

Because every unit of output produced in excess of output level qsoc is a unit for which the total costs exceed the benefits.

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13
Q

Is the common reaction to negative externalities - to outlaw them! - ever socially optimal?

A

No.

Look at the socially optimal output level qsoc below. This quantity is a positive number - i.e. producing steel is socially optimal even though some pollution is going to be produced along the way.

ex. cars create pollution, how do we stop this? ban ALL cars? But what about ambulances and fire engines, should we ban them too?

Not at all, because although these vehicles do emit some pollution, the costs imposed on society by the pollution are more than compensated for by their social benefits - the lifesaving activites in which the vehicles are engaged.

The same reasoning applies for the pollution being produced by the steel factory at output level qsoc.

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14
Q

Is the goal to eliminate negative externalities?

A

No, the goal is to ensure that when ALL costs and ALL benefits are weighed, the benefits from the units of output that are produced outweigh the costs of producing them - including the costs of the negative externalities.

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15
Q

What are the three ways of dealing with negative externalities?

A

1) Pass laws banning or restricting activites that generate negative externalities i.e. most cities now forbid you to dispose of your rubbish by burning it.
2) Pass laws that directly target the neg ext itself (rather than the underlying activity that leads to the ext) i.e. still mills are now required to insert scrubbers to remove the pollution before it goes on to the atmosphere
3) Impose costs like taxes on people or firms generating neg ext’s i.e. a pollution surcharge on SUV’s i.e. pollution tax

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16
Q

Why do economists like pollution taxes the most?

A

Remember: XC is the external cost of the steel mill’s pollution on others.

If the gov impose a tax of XC pounds on every unit of steel produced by the firm, the tax raises the firm’s cost curve up vertically from PRIVATE MC to SOCIAL MC.

So when s and d curves interact, the socially optimal output level qsoc is produced.

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17
Q

What is the issue with policies in which firms are ordered to install scrubbers to reduce pollution?

A

You need to hire inspectors to monitor factories constantly to make sure factories aren’t cheating.

This is a much more costly system than simply imposing a tax on the mill’s easily measured steel output and then letting s and d set the socially optimal output level.

18
Q

What is one issue with setting the XC tax?

A

Working out exactly how large the tax XC needs to be to work as an effective deterrent is difficult.

19
Q

In our positive externality (bee keeper) example, is the beekeeper paid by the farmer?

A

No. The farmers don’t pay her for the benefits that her bees bring them - they just fly in and out of their fields and theres no way of keeping track of them - so the result is: she is going to raise fewer hives of bees (underproduction) than she would if the farmers were paying her for the benefits that her bees bring them.

20
Q

Graphically depict how the beekeeper underproduces honey (which has a positive externality).

A

Her supply curve = MC curve

private demand = customers demand for honey

where the s curve and the private d curve intersect gives the market equilibrium for honey, qm.

21
Q

What does the market equilibrium quantity of honey qm not take into account?

A

This output level does not take into account the benefits that bees bring to farmers. Imagine these benefits have a monetary value of XB = external benefits. Then the total social demand for her honey is given by the SOCIAL DEMAND curve, which is the PRIVATE DEMAND curve + XB pounds to account for the benefits that go to the farmers as well as the customers.

22
Q

Where is the socially optimal output level of honey?

A

At qsoc. Where the SOCIAL DEMAND curve crosses her SUPPLY CURVE because, for each unit of output up to and including qsoc, the total social benefit is at least as great as her cost of production.

23
Q

Is the market equilibrium quantity of honey qm more or less than the socially optimal output level, qsoc?

A

qm is less than qsoc

In other words, because the market mechanism has no way of taking into account the positive externality, Sally produces less honey than is socially optimal.

24
Q

What is the most common way to encourage higher production of goods that generate positive externalities?

A

Using a subsidy.

i.e. the gov may pay sally say 20p per kilo of honey to encourage her to keep more hives. The result = more bees pollinating more flowers, leading to higher output levels for farmers.

in fact, govs may even tax farmers to get the money to subsidise dally’s honey = makes the programme pay for itself.

25
Q

What is another ex. of govs subsidizing positive externalities.

A

Govs often subsidise the planting of trees in and around cities. They must do so because many of the benefits of trees - shade, cooling, cleaner air, less soil errosion etc - are positive externalities that markets don’t take into account. Without the subsidy, fewer trees would be planted than is socially optimal.

26
Q

What is the tragedy of the commons?

A

Economists refer to the important economic problem that results from poorly defined property rights, which don’t take account of negative externalities, as the TRAGEDY OF THE COMMONS.

27
Q

Describe the tragedy of the commons using an example.

A

Imagine one farming town where most of the land is PRIVATELY owned. However the twon has one large field of COMMON LAND - where anyone can graze their cattle.

28
Q

In our farming town ex. how much cattle is grazed on PRIVATE land?

A

In a private field, the owner has an incentive to limit the no. of cattle that he puts out to graze. Thats because if he puts too many cows in the field, they eat all the grass and ruin the field for future grazers.

So he only puts a few cows out to graze which reduces his short-run profits (because he restricts the current no. of cows) but maximises his long term profits (because the field stays in good shape and he can keep grazing well into the future).

29
Q

In our farming town ex. how much cattle is grazed on COMMON land?

A

Because the field is commonly owned, you don’t have to pay for the right to graze cattle there. So everyone is going to want to do so because the personal cost is zero.

But because everyone is thinking the same thing, the field is soon overrun with cattle and ruined as they eat all the grass = turns into a mess.

So although putting a cow out to graze on a common field incurs no personal cost, a social cost IS incurred. Each additional cow causes damage to the field - damage that reduces the future productivity of the field.

30
Q

What causes the difference in what happens to the common/private land?

A

The difference is due to the different property rights governing the 2 types of land.

For privately owned fields - farmers have an incentive to weigh the costs as well as the benefits of putting out more cattle to graze.

Whereas with the commonly owned land - nobody has a personal incentive to preserve its future usability.

31
Q

What is the most important thing to take away from the tragedy of the commons?

A

That in the absence of any other regimes or management system, individual incentive to overexploit the common resource tends to form a runaway destruction of the resource.

32
Q

What is the tragedy of the ANTIcommons?

A

This is a variant of the tragedy of the commons that looks at the case of goods that are socially underexploited due to the existence of private property rights.

ex. think of the case of the DVD of a TV series that can’t be produced because the property rights to the music in the series are too expensive to license.

33
Q

What is the key thing to take away from the tragedy of the ANTIcommons?

A

The key thing to take away is that economists aren’t keen on property rights just because they are property rights; they like them because property rights work when you do a CBA of the situation.

in our DVD ex economists would like to test the degree of harm done by the overly strong property rights and recommend modifying them to mitigate the costs. The principal behind the way we look at the problem, though, remains the same.

34
Q

Why do poor property rights cause animal extinctions?

A

Many enviro issues are caused by the tragedy of the commons situation in which nobody owns the property rights to a given resource. Notbaly, most animal extinctions are caused by the absence of property rights.

ex. tuna in the ocean. By international treaty, nobody owns the ocean - hence nobody owns the tune swimming in the ocean.

35
Q

How do you acquire a property right for the tuna in the ocean?

A

If you catch it and pull it on your boat you then have a property right over it and can sell the fish for money. That is, the only way to benefit economically from a tuna is to kill it.

The result = tuna/many fish species are over-fished, leading to near extinction as each boat has the same incentive to harvest as many fish ASAP before anyone else does.

36
Q

Why does nobody have an incentive to hold back in the fishing of tuna?

A

because of the way the property rights are set up, no single boat can prevent the calamity from happening.

If one boat decides to hold back and take fewer fish with the hope that by doing so the species will be saved, someone else just comes in and catches the fish that were spared. The species become distinct anyway.

37
Q

What do economists do to prevent a tragedy of the commons situation?

A

Their first instinct is to change the property rights system governing the resource in question. Instead of COMMONLY hel property rights in which each person has an incentive to take as much of the resource as possible before anyone else does, economists suggest PRIVATE ownership so an incentive exists to preserve the resource.

38
Q

What is one solution to the over-fishing issue?

A

To give fishers PRIVATE property rights to an entire fishing ground.

That gives the new owners the proper incentive to manage the stock on a sustainable basis.

Furthermore, because only one person has the right to fish there, a mad rush no longer exists between competing fishers.

39
Q

What is one solution for fish species that migrate freely between different area?

A

Biologists first determine the max. number of fish that can be sustainably harvested each year. The gov then auctions off fishing permits for exactly that amount of fish.

40
Q

What is advantageous about the ‘fishing permit’ method?

A

The method prevents the tragedy of the commons by creating a new sort of property right - the fishing permit.

The method also has a nice benefit of creating a self-sufficient governement programme.

The money raised from auctioning off the permits can be used to hire game wardens to prevent unlicensed fishing, as well as for conservation and wildlife mgmt programmes.

41
Q

Give an ex. of a technique used for carbon emmissions similar to the fishing permit.

A

In EU and USA a ‘property right’ to a certain amount of emmissions is granted by the gov, and firms that are more efficient are allowed to sell the surplus emmisions that they don’t need to less efficient firms.

In this way, emmisions are not only capped, but also firms are given good incentives to deal with the problem.