Question

Discuss what we mean by property rights and how it affects economic activity.

Answer 1

The term property right refers to an owner's right to use a good or asset for consumption and/or income generation. It can also include the right to transfer it to another party, in the form of a sale or gift. A property right also typically conveys the right to contract with other parties by renting, pledging, or mortgaging a good or asset, or by allowing other parties to use it.

In layman's language, Property rights are the ability of an individual to own and exercise control over scarce resources.

Effects of Property rights on Economic Activity

• Expropriation risk – insecure property rights imply that individuals may fail to realize the fruits of their investment and efforts. This will lead to no investment or efforts in Research and development as they don't have any incentive to do so.
• Insecure property rights lead to costs that individuals have to incur to defend their property, which, from the economic point of view, is unproductive. For example the cost of copyrighting and patenting.
• The third is the failure to facilitate gains from trade – a productive economy requires that assets be used by those who can do so most productively, and improvements in property rights facilitate this.
• Modern market economies rely on collateral to support a variety of financial market transactions, and improving property rights may increase productivity by enhancing such possibilities. Finances are provided on the collateral but if there will be no well-defined property rights it will lead fall in lending and therefore overall fall in economic development.