Chapter 14
Property Rights & Transaction
Costs
14.1 Property Right
A. Introduction
- A property right is a ___________ __________ right to select use of an
economic goods.
- Structures of rights range from __________ property rights to
-
_________ property rights.
Different structures of right  different economic __________ 
different ways of ___________.
E.g.
Forms of property
Types of economic
Ways to determine
Types of
right
systems
resource allocation
competition
& income
distribution
Private property
economy
competition
right
Common property
economy
competition /
compete for
_________ ____
right
B. Private property right
A good is defined as private property if its owner has the following rights :
(a) _____________ right to use
(b) ___________________ to receive __________ generated from the use of
the property
(c) ___________________ to ___________ the property to others
Remarks :
(a) Consider that (a) does not necessarily imply (b) and (c), but (c) implies the
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existence of (a).
(b) If one or more of these rights are restricted then the private property rights
of the good are said to be _____________.
(c) In fact exclusivity and transferability of a good are frequently matters of
degree.
(d) Government regulations like price controls, taxations will affect the
private property rights of individual  affect human behaviour (will be
discussed in Chapter 15).
C. Common property rights
A good is defined as common property if
-
no delimitation or delineation of its _______ _______ to any private
party. No exclusive rights mentioned in section B over the property.
all are free to __________ for its use.
D. Resource allocation under different systems of property rights
Case of Gordon’s fishery :
Assuming (a) there is a fishing pond;
(b) a competitive market of fishermen;
(c) price of hiring a fisherman is H (=MFC=AFC).
$
H=MFC=AFC
MRP
ARP
0
L1 L2
Quantity of labour
1. With private property rights
- The owner of the fishing pond, aiming at maximizing wealth will
-
hire _____ units of labour.
The rent received by the owner is area _________.
2. With common property rights
- As long as ________ is larger than H (the highest-valued
alternative earnings), additional units of labour will enter the pond
until ______ units of labour work in the fishing pond.
- At that level of labour, MRP > / < / = MFC  ________________
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occurs. The rent obtained from it reduces to _______.
 Common property rights lead to _______________________ which
means some potential gains is not captured by any person. In other
words, it is wasted under competition. (Will be discussed in details in
Chapter 15.)
14.2 Transaction Costs
A. What are included ?
1. Information cost
Cost incurred in getting to know the product, including its _______, its
__________, etc..
2. Defining / delineating cost
Cost incurred in setting the _____________________________________.
3. Measurement / pricing cost
Cost incurred in measuring the _____________ and deciding on the
________ of goods.
4. Negotiating and contracting / exchanging cost
Cost incurred in _____________exchange and __________ __________.
5. Policing and enforcing costs
Cost incurred in protecting one’s ____________ ________.
Remarks :
(a) It is difficult to distinguish clearly among these costs  lump them
together and call them _____________ ________.
(b) To say maximizing wealth is the same as _______________ cost  people
find ways to _____________ transaction costs  the existence of
transaction costs can be used to explain __________ ______________.
B. Definition
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
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C. Reasons for the existence of transaction costs
1. Lack of knowledge
2. Dishonesty or even the inclination to offer false information
3. Difficulty of measurement
D. Exchange with transaction cost
1. Recall :
(a) The equilibrium condition of exchange without transaction costs
Buyer’s __________ = _______________________ = _________ ______
(b) The equilibrium condition of exchange with transaction costs (assuming
both the buyer and seller bear the costs)
=
2. How is the existence of middlemen improves exchange ?
$
initial endowment
$
=
A’s MUV
B’s MUV
0A
0B
(a) With transaction cost and assuming it is wholly borne by the seller, the
volume of exchange is ________. The potential gains remain
uncaptured is _____ and the total transaction costs incurred is ______.
(b) With the existence of middlemen, the transaction cost is reduced and a
middleman fee is charged. Assuming again the fee is wholly borne by
the seller, the volume of exchange is smaller / greater (______). The
potential gains remain uncaptured is smaller / greater (______).
E. Economic phenomena explained by transaction costs
1. Existence of middlemen
2. Holding inventories
- There is transient change in demand everyday or even every minute but
price quoted by seller will not be instantly adjusted to its equilibrium level.
Why ?
______________________________________________________________
______________________________________________________________
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______________________________________________________________
______________________________________________________________
 sellers try to reduce the ______________ and __________ costs by
holding inventories to meet transient change in demand.
- Holding inventories seems to make the good more _____________ but
consider the save in _______________ costs, the goods are actually made
__________.
- The amount of inventories seller hold will be at the point where MC equals
the marginal saving in _______________ ________.
Q. Why queue ? (E.g. dining at restaurants, clients in hairdressing salons, clinics,
etc..) Why don’t the sellers hold inventories ?
Ans. ____________________________________________________________
3. Bargaining
Bargaining consumes time. That means bargaining is costly. But still we find
that people often bargain. It is because that it can reduce the cost of _________.
4. People prefer brand names more
Brand names can help consumers to identify goods and services of verified,
predictable standards of quality  it saves _____________ cost.
5. Better seats tend to be underpriced
Underpricing will tend to ensure that better seats are fully occupied  least
costly ways of enforcing the rights to seats. That is, saving from employing
additional ushers to enforce the rights > ____________________________.
6. In some Chinese restaurants, customers are allowed to stand rudely beside
customers who are lunching.
This situation is simply to allow those standing to __________ ________ the
diners in a shorter time  save the ______________ cost.
7. In traditional China, girls were subjected to foot-binding.
This can be explained as reducing the costs of _____________ the rights to a
bride. That is, the save in ____________ ______ > the loss from reduced
productivity.
**END**
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