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Unformatted text preview: REGULATION UNDER CERTAINTY I Property Rights Institutions that create property rights are a central requirement of the welfare theorems. Definition 17 A PROPERTY RIGHT is a title to, or ownership of, a good or bad. It entitles the owner to: 1. Enjoy the benefits and costs of the good, and prevent others from doing so without compensation. 2. Sell the good in a market and therefore transfer ownership and benefits and costs. Property rights, and thus the welfare theorems, require well-functioning institutions. • Without a police force and functioning justice system, most goods are non-excludable and are therefore under-provided in a market economy. • In many Latin American countries, it is difficult to obtain clear title to your property and keep squatters from using other’s land. Not surprisingly, such properties tend to be underdeveloped. No one wants to risk building on the property when the property may be taken at any time. • No one talks about over-harvesting of cattle (clear property rights) the way they talk about over-fishing (unclear property rights). A Who Should Be Assigned Property Rights? In order for markets to function, the government must assign property rights when they are unclear, and then enforce the property rights. For most goods, like land and housing, it is clear who to assign the property rights to. Environmental goods are less clear. 1. Who should have rights to the stream, the farmer for irrigation or the fishing industry? 2. Who should have rights to the land which contains an endangered species, the developer or the public? 35 1 Efficient Allocation Let us compute the efficient allocation, and then see if assigning property rights to one party or another results in an efficient allocation. One recent example is sugar farming and the Everglades. Suppose: • A farm produces sugar ( S ) and fertilizer run-off from the farm eventually ends up in the Everglades where it kills fish. • A fishing company produces fishing trips ( T ) in the Everglades. • The cost of producing sugar is C S ( S ). • The cost of a fishing trip is C T ( T,S ): more sugar production makes fish more difficult to find, requiring more time on the boat, gas, etc. We have an externality: farm production affects fishing without compensation. But there is an easy way to resolve this externality: merge the firms. The merged firm maximizes profits: π = p s S + p T T − C S ( S ) − C T ( S,T ) (7) Sugar production then increases until the price equals the marginal cost, but the marginal cost includes the higher cost of fishing production: MC S Ps $ Demand Merged firm Production Sugar firm production MC + MD S ∗ S Figure 24: Sugar production for the sugar firm and the merged sugar and fishing firm....
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- Fall '11
- Environmental Economics, Externality, MD