Question

1) What are private property rights? Why are private property rights so important? In your answer, please emphasize the role of private property rights incentives.

2) Elaborate upon the role that well-defined private property rights plays in business. How can organizations adjust how they approach the enforcement of property rights given their overall strategy and placement within the market?

Answer 1

1) Private property rights are central to a capitalist economy, its execution, and its legal defenses. Capitalism is built on the free exchange of goods and services between different parties, and nobody can rightfully trade property they do not own. Conversely, property rights provide a legal framework for prosecuting aggression against non-voluntary means of acquiring resources; there is no need for capitalist trade in a society where people could simply take from others what they want by force or the threat of force.

The reason humans are willing to compete with each other in voluntary trade is because laws exist which protect private property. For a person to receive property he believes is valuable, he must provide a service that someone else believes is valuable. Everyone gains – in the ex-ante sense.

• Property rights define the theoretical and legal ownership of resources and how they can be used.
• Property can be owned by individuals, businesses, and governments.
• These rights define the benefits associated with ownership of the property.
• the right to use the good
• the right to earn income from the good
• the right to transfer the good to others, alter it, abandon it, or destroy it (the right to ownership cessation)
• the right to enforce property rights

Private property rights are one of the pillars of capitalist economies, as well as many legal systems, and moral philosophies. Within a private property rights regime, individuals need the ability to exclude others from the uses and benefits of their property.

All privately owned resources are rivalrous, meaning only a single user may possess the title and legal claim to the property. Private property owners also have the exclusive right to use and benefit from the services or products. Private property owners may exchange the resource on a voluntary basis.

A property right is the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals. Society approves the uses selected by the holder of the property right with governmental administered force and with social ostracism. If the resource is owned by the government, the agent who determines its use has to operate under a set of rules determined, in the United States, by Congress or by executive agencies it has charged with that role.

Private property rights have two other attributes in addition to determining the use of a resource. One is the exclusive right to the services of the resource. Thus, for example, the owner of an apartment with complete property rights to the apartment has the right to determine whether to rent it out and, if so, which tenant to rent to; to live in it himself; or to use it in any other peaceful way. That is the right to determine the use. If the owner rents out the apartment, he also has the right to all the rental income from the property. That is the right to the services of the resources (the rent).

Finally, a private property right includes the right to delegate, rent, or sell any portion of the rights by exchange or gift at whatever price the owner determines (provided someone is willing to pay that price). If I am not allowed to buy some rights from you and you therefore are not allowed to sell rights to me, private property rights are reduced. Thus, the three basic elements of private property are (1) exclusivity of rights to choose the use of a resource, (2) exclusivity of rights to the services of a resource, and (3) rights to exchange the resource at mutually agreeable terms.

2) The property rights approach to the theory of the firm based on the incomplete contracting paradigm was developed by Sanford Grossman, Oliver Hart, and John Moore. These authors argue that in the real world, contracts are incomplete and hence it is impossible to contractually specify what decisions will have to be taken in any conceivable state of the world. There will be renegotiations in the future, so parties have insufficient investment incentives (since they will only get a fraction of the investment's return in future negotiations); i.e., there is a hold-up problem. Hence, property rights matter, because they determine who has control over future decisions if no agreement will be reached. In other words, property rights determine the parties' future bargaining positions (while their bargaining powers, i.e. their fractions of the renegotiation surplus, are independent of the property rights allocation). The property rights approach to the theory of the firm can thus explain pros and cons of integration in the context of private firms. Yet, it has also been applied in various other frameworks such as public good provision and privatization. The property rights approach has been extended in many directions. For instance, some authors have studied different bargaining solutions, while other authors have studied the role of asymmetric information.

Implicit or explicit property rights can be created by regulating the environment, either through prescriptive command and control approaches (e.g. limits on input/output/discharge quantities, specified processes/equipment, audits) or by market-based instruments (e.g. taxes, transferable permits or quotas), and more recently through cooperative, self-regulatory, post-regulatory and reflexive law approaches. See the Conservation Property Right

It has been proposed by Ronald Coase that clearly defining and assigning property rights would resolve environmental problems by internalizing externalities and relying on incentives of private owners to conserve resources for the future. At common law nuisance and tort law allows adjacent property holders to seek compensation when individual actions diminish the air and water quality for adjacent landowners. Critics of this view argue that this assumes that it is possible to internalize all environmental benefits, that owners will have perfect information, that scale economies are manageable, transaction costs are bearable, and that legal frameworks operate efficiently

Property rights to a good must be defined, their use must be monitored, and possession of rights must be enforced. The costs of defining, monitoring, and enforcing property rights are termed transaction costs. Depending on the level of transaction costs, various forms of property rights institutions will develop. Each institutional form can be described by the distribution of rights.

The following list is ordered from no property rights defined to all property rights being held by individuals

• Nobodies property (res nullius) is not 'owned' by anyone. It is non-excludable (no one can exclude anyone else from using it), non-transferable, but may be rival (one person's use of it reduces the quantity available to other users). Open-access property is not managed by anyone, and access to it is not controlled. There is no constraint on anyone using open-access property (excluding people is either impossible or prohibitively costly). Examples of currently open-access property is outer space or ocean fisheries (outside of territorial borders).

Open-access property may exist because ownership has never been established, granted, by laws within a particular country, or because no effective controls are in place, or feasible, i.e., the cost of exclusivity outweighs the benefits. The government can sometimes effectively convert open access property into private, common, or public property through the land grant process, by legislating to define public/private rights previously not granted.