Question

4. a) Do you think that an explicit delineation of property rights usually eliminates the problem of property rights? Defend your answer.

b) Explain how assigning property rights might help mitigate the negative externality of production by a firm by internalizing the externality. Explain the economic intuition of the solution.

Answer 1

4. a) Yes, I do think that an explicit delineation of property rights eliminates the problem of property rights as there is no issue of who is going to spend if there is trespassing and there is damage, those rules and regulations are clearly mentioned. But the explicit delineation has to be universal, there can't be an instance where it is partially available to some people in a district and not mentioned in others, this creaters discrepancy and can lead to conflicts, also the property rights need to be similar across regions which increases efficiency.

b) Externalities come into place when one party is worse off because of the actions of the other. Internalizing the externality essentially means whenever private negotiations or government actions lead to a price which reflects the external costs. Negative externality of production might arise for a firm when it imposes a net cost. For example it pollutes a lake which is situated close to the factory. By essentially assigning property rights that the firm will have to pay a certain amount for polluting a lake, the externality is internalized, because of which the marginal cost increases of the firm and the quantity produced falls.