The Back-Stage Role Of Property Rights

What are Property rights?

Economics, as we all have been taught, is the subject concerned with the allocation of scarce resources. Demand and supply, opportunity cost and trade-offs, and even price controls are concepts that come to mind when one thinks about the economy and its working. But, Property Rights are one of the several institutions that work behind-the-scenes and determine the efficiency of the economy.

Before diving deep into how these ‘rights’ help all of us, it’s important to understand what their purpose is. Stated simply - Property Rights determine how a resource can be owned, used, and gained benefit from, by an individual or groups of individuals. These are legal rights.

The resources/property can refer to a lot of things. One can exercise property rights over land, buildings, artwork, birds, and even inventions and ideas. Thus, the resources over which such rights are exercised can be tangible or intangible. Such rights have become essential to how a society functions now.

A person who lives alone on a deserted island won’t be concerned whether they have the right to property over the coconut tree on the island. However, as civilisations form and people start coming and living together, it becomes crucial to determine who owns what. Resources become scarce. So, their ownership poses an important question.

Property Rights can be exercised by individuals, the government or businesses.

Private property resources are resources that the owner(s) can exclude other people from using. These include apartments, cars, phones, etc. Rights to private property come with the right to be able to choose the use of the resource, as well as, the right to use the services of the resource. For instance, a privately-owned vehicle can be used by the owner in whichever way they would like to. If one day the owner decides to use the vehicle as a taxi, they have the right to earn from the transportation services of the vehicle.

Lastly, private property rights also provide the owner with the ability to sell these rights. The owner of the vehicle can transfer the property rights by selling the vehicle to another person. The buyer possesses the property rights afterwards.

Another type of property is called Public Property. Such resources are owned by the government. Property rights to such resources are exercised by a government agency or a related organization. In India, Railways, Museums, Power Stations etc. are publicly owned. An individual like you and me cannot dictate whether person X should be allowed to buy a train ticket or not. However, the government can. By setting prices, the government exercises its property rights over such resources and excludes people who cannot pay for the resource.

Common property resources are owned by no one. They are available to everyone for use. They are also referred to as ‘open-access property’. Property like rivers, canals, air, parks and beaches exist in the world that are not owned by anyone. Such absence of property rights resources poses us with the following question: what does an economy have to lose if it doesn’t have property rights?

Implications of an absence of Property Rights

Some resources do not have property rights. Such a situation might occur if the resource is too expensive to manage or if it’s practically impossible to demarcate boundaries and rights over it (like water bodies). This encourages several issues.

When the property doesn’t define who has ownership over it, it becomes susceptible to ill-maintenance. Imagine, if the park in your locality wasn’t owned by anyone (but open to everyone for use), would anyone go out of their way to clean it, cut the grass or empty the dust-bins? Of course, a few benevolent people might take notice and take the matter of its maintenance in their own hands. But why should an economy leave room for such uncertainty? This is also a situation of moral hazard. You might expect someone else to take charge and clean the park. Other people will think likewise.

Misuse and excessive use of the resource cannot be kept in check if no one has property rights to the resource. It leads to the Tragedy of Commons - when a resource is shared by everyone, everyone acts in their own interest, leading to the depletion of the resource.

It also becomes difficult to put a price on the resource if it can be easily stolen. If the author doesn’t have property rights over their book, the general public can easily photocopy the text and share it with others. No one would be willing to pay a higher price for something that they can get for free, or at a lower price. This way, the price-setting mechanism suffers from serious inefficiencies in dictating what the price of the resource should be.

Lastly, markets cease to exist in the absence of property rights. There is no incentive to trade and invest if one cannot use the resource according to their will. In fact, price control measures and Minimum Wage laws reduce the property rights of individuals to buy and sell goods and their own labour at the rates that the market sets.

It’s clear why an economy needs to have property rights. We can now look at how the property rights either that are exercised by the government or the individuals guide the economy.

Significance of Property Rights

As established before, private property rights allow the owner to do whatever they wish to do with the resource. There is no interference. Obviously, private property rights sustain a capitalist country. Division of ownership over the resources and zero interference acts as the invisible hand and ensures efficiency of resources. In fact, the price of the property comes from the demand and supply that reflects the value that the people place on the property. In a way, the property is privately owned, but the way it is perceived by the public influences the use of it. In a free-market economy, government interference is not tolerated. However, government control is needed to ensure that everyone has property rights. If you don’t have rights to your house, you won’t buy it for the fear of it being encroached on by someone else. If a musical artist’s work isn’t protected by copyrights, they would have no incentive to keep producing. Thus, private property rights protect an individual’s freedom to produce, use, earn and direct the economy.

When the government decides who owns what, and itself owns most of what the economy is made of, the economy acts differently. Such ownership of property does make the economy more effective in some cases. There are certain resources in the economy which are tricky to be owned privately. There are mainly two reasons for such difficulty. First, many types of property are non-excludable. One can’t prevent others from using a street light or a lighthouse. Second, the property may not be profitable. These two factors prevent individuals and firms from taking ownership of the resource. The government is forced to enter the market. In some parts of the world, this extent of ownership is extreme - and leads to the birth of a socialist economy. Such an economy runs the risk of losing out on economic growth because people no longer have the incentive to engage in economic activities.

In conclusion, trade and investment would be impossible to carry out if no one owned anything. Resources would run the risk of depletion. Whether the property rights are exercised by individuals and businesses, and/or the government, they are essential to a well-developed economy.

References:

https://www.econlib.org/library/Enc/PropertyRights.html

https://www.investopedia.com/terms/p/property_rights.asp

https://www.economicsonline.co.uk/Market_failures/Property_rights.html