Question

What are private property rights (3 characteristics)? How do imperfections in these characteristics affect incentives and information? Why is the expected outcome in a commons for a resource to be overused (think property rights and incentives)?

Answer 1

Private property rights pertain to the rights, privileges and limitations for the owner of the resource with regard to the use of the resource. Private property rights have three characteristics

1. Exclusivity; meaning the owner of the resource has the sole right over the cost and benefits from owning the resource
2. Transferability; meaning the property rights should be transferable from one owner to the other in a voluntary exchange procedure
3. Enforceability; meaning there should exist legal and administrative structure that can enforce the property right and protect the owner of the resource from seizure or encroachment by others

However, in reality there are several resources in whose case it is next to impossible to enforce private property rights like grasslands, and fish in the ocean. This is because the nature of the resources is such that it cannot be put under the exclusive ownership of an individual, and even if it is done it is next to impossible to enforce it as the size of the resource is such.

Reason why expected outcome in a commons for a resource to be overused, is that nobody has the exclusive right over such resource. So, people does not have the incentive to use them optimally. If someone decides not to maximize the use of such a resource, then it doesn’t mean that the others will do the same. As a result, all the people try to use the resource to the maximum.