Property rights and Market Failure Flashcards
(10 cards)
What are common access resources (CAR), and why do they lead to market failure?
Common access resources (CAR), like seas, air, and forests, are non-excludable and rivalrous, meaning anyone can use them. This leads to market failure because there are perverse incentives to overexploit these resources since no one owns them and can be held accountable.
How do property rights help solve the problem of overexploitation of common access resources (CAR)?
Property rights address this problem by assigning ownership of the resource to an individual or entity. The owner has an incentive to preserve the resource and avoid overuse since their income and welfare depend on the sustainability of the resource.
How does owning a portion of a forest provide an incentive to prevent overexploitation?
If a private producer owns part of a forest, they have an incentive to manage it sustainably because overexploiting the resource (e.g., cutting down too many trees) would lead to a loss in future income and affect their long-term profits.
What happens if a producer violates the property rights of another producer?
If someone trespasses or violates another producer’s property rights, the owner can sue for damages. This legal enforcement incentivizes individuals to respect property rights and manage the resources carefully.
How do property rights internalize negative externalities?
By assigning ownership, any negative externalities (such as overexploitation) are internalized because the producer suffers the consequences of their actions (e.g., loss of income from unsustainable resource use). This creates an incentive to manage the resource responsibly.
If property rights are well-issued, how can they lead to socially optimal outcomes?
If property rights are effectively distributed, they create incentives for individuals to manage resources sustainably, which helps avoid over-exploitation and leads to outcomes at the socially optimal level, achieving allocative efficiency and welfare maximization.
What is the major issue with distributing property rights over certain resources, like air and sea?
Air and sea are non-excludable, meaning they can’t be “chunked up” and assigned individual property rights. While property rights can be issued for land or forests, applying this to resources like air is not feasible.
What enforcement challenges arise when property rights are assigned?
Enforcement of property rights can be costly. Governments may not have the resources to monitor and prevent trespassing or violations. Without proper enforcement, the system can break down and fail to prevent overuse of resources.
What equity issue might arise when assigning property rights between two economic agents (e.g., a chemical plant and local villagers)?
The distribution of property rights can create inequities. For example, if a chemical plant and local villagers both want access to a river, the party that gets the rights may dominate. This could lead to the plant having to pay the villagers to use the river or vice versa, potentially causing social harm to the disadvantaged party.
What is the risk of assigning property rights in a situation where one party dominates the resource?
If one party dominates the resource, the less powerful group may lose access or face severe consequences, leading to inequities. For instance, if the chemical plant gets rights, the villagers may be unable to use the river for drinking or bathing, creating a social dilemma.
