Although private property is probably the most basic institution affecting the allocation of resources, common property, with multiple owners or users, is an alternative that is also prevalent and can have advantages over private property in some cases. Given the importance of these two basic kinds of property rights, we'll start off by comparing the two and asking which one makes the most sense in different kinds of situations.
Key Definitions: Transaction costs, exclusion costs, coordination costs
Just as efficient private property involves costs, so does common property. When considering whether private property or common property is preferable for a given resource, we would like to know whether these costs are relatively large or small. Economists call these costs transaction costs, to refer to all the costs associated with a particular institutional mechanism, including monitoring and enforcement, administrative costs, waste, and so on. In the case of private property, the owner incurs costs to keep others from using or infringing on the rights of the owner of a privately owned resource. We'll call these kinds of transaction costs exclusion costs. In the case of common property, we also have transaction costs related to coordinating the use of the resource among a group of users. We'll call these transaction costs coordination costs, and include the monitoring, enforcement, and administrative costs (meetings, dispute settlement, etc.) necessary to control the free rider problems that tempt users of a common property. Choosing between common property and private property for allocating a given resource will depend, among other things, on these transaction costs. Both exclusion costs and coordination costs can be relatively high or low depending on a variety of factors. If the exclusion costs for private property are lower than the coordination costs for common property, then private property would be preferable (if there are no other reasons to favor the high-cost arrangement over the low-cost arrangement). If the costs of exclusion are higher than the costs of coordination, then common property should prevail.
In figure 9.3 we can represent a particular resource in a specific kind of setting (e.g., a pasture in fourteenth-century Spain, a well in an African village) as a point that reflects the transaction costs that would result under either private property or common property. The coordinates of each point represent the coordination costs that would exist under common property (the value on the x axis) and the exclusion costs that would exist under private property (the value on the y axis). Either type of transaction cost may be relatively high or low depending on the characteristics of the resource, the characteristics of the group of users, and the larger socioeconomic setting in which they reside.
For a sidewalk, we might indicate this as point A on the graph, where the costs of coordination are very low relative to the costs of exclusion under private property. The property rights institution in this case is just the self-enforcing, informal stay-to-the-right rule. For wristwatches, we might find that private property costs (individual ownership including protecting your wristwatch from theft) are lower than under common property (some
Exclusion costs for private property
Exclusion costs for private property
■ FIGURE 9.3 Transaction costs for private property and common property arrangement whereby wristwatches are shared among a group of people). We might represent this example as point B. Depending on the region or country in question, timber resources might be situated at either point C or point D; the same could be true for elk or buffalo herds, or an aquifer.
The coordinates depicted in a graph like this for a given kind of resource would vary by location and would also change with changing circumstances such as population or social cohesion. Presumably, a common property wristwatch could be shared among members of a small family at lower coordination costs than among all residents of a town. Neighbors sometimes adopt common property for ladders or other yard tools, or even a trailer or pickup truck, which are normally seen as private property. Although many people think of industrialized countries as dominated by private property, common property arrangements abound, often managed by a more formal common property institution: government. Our air, water, public lands, and forests are all forms of common property allocated under a set of government rules and regulations. For some resources, such as migratory seabirds, whales, and the global atmosphere, national government institutions are not adequate. Forms of international common property are reflected in treaties such as the Law of the Sea and the Montreal Protocol.
There is a third choice, open access. In some cases the transaction costs for either private or common property will exceed the benefits of establishing property rights. This could be because the resource has a low value, or because establishing effective coordination or exclusion is very costly (think of rocks at the bottom of the ocean, or lunar real estate). In these cases open access (no effective institution) can actually be the most efficient choice, leaving the resource available for anybody to use. In many other cases, though, open access is the outcome popularly known as tragedy of the commons (see chapter 5), where institutions are absent or ineffective, resulting in the degradation of a valuable resource.
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