Part III: Common Property Resources: Thinking in Terms of Property Rights
No one has Exclusive Rights to a Common Property Resource.
It is possible to Define Public Goods and Congestible Goods in Terms of Property Rights
Problem:
Solution:
Property Rights Not Explicit or Defensible
Make Explicit and Defensible

Farmer:
Society:
“Tragedy of the Commons” ….
Result of Common Property Resource Allocation
Marginal Benefit of Cow
The Increase in Profits the Cow brings in because it grazed in the Commons
The Same
Marginal Cost of Cow
The Decrease in Profits per Cow
(due to the Extra Cow)
Across All the Farmer’s Cows
The Decrease in Profits per Cow
(due to the Extra Cow)
Across All Cows
“Fugitive Property Rights”

Part IV: One Solution… Property Rights
Ronald Coase wrote
“The Problem of Social Cost”
Coase realized that there was a
“Reciprocal Nature to Externalities”.
Coase Theorem:
When Parties Affected by Externalities
Can Negotiate Costlessly with One Another, an Efficient Outcome Results
No Matter
How the Law Assigns Responsibility for Damages.

Example:
Imagine the doctor gets $60/day in damage from listening to noise, and
Confectioner receives $40/day in profits from making noise
Case 1:
Case 2:
Doctor Given Rights to Noiseless Environment.
Doctor Demands at least $60 to Listen to Noise.
Confectioner will pay up to $40 to Make Noise
Confectioner cannot pay enough.
Confectioner closes: gets $0.
Doctor keeps $60
—all patients get service.
Confectioner Given Rights to Noisy Environment
Confectioner Demands at least $40 to Stop Noise.
Doctor will pay up to $60 to Stop the Noise
Doctor Pays Confectioner between $40-60
Confectioner closes: gets ~$40
Doctor Nets ~$20 —all patients get service.
Always:
Property Rights Determine:
Patients Get Service and there is No Noise
Distribution of wealth

Same Efficiency Result Occurs
Regardless of Who Has the Rights.
On Distributional Grounds the Parties Are Not Indifferent.

For Efficiency: property rights contracts allowed contracts enforceable
Negotiation costs low
Two important points:
1. The more parties to an agreement, the higher the transaction cost, the less likely there will be an agreement.
2. The larger the gains to any party, the more likely there will be an agreement.
Coase’s Rule:
The most efficient laws and social institutions are the ones that place the burden of adjustment to externalities on those who can accomplish it at least cost.