PROPERTY RIGHTS

What are the characteristics of an adequate set of property rights?

Property Rights

➢Bundle of entitlements defining the owner’s rights, privileges, and limitations for use of a resource
(Tietenberg).

➢Rules that specify both the proper relationships among people with respect to the use of things and the
penalties for violating those proper relationships (Randall).
Non-Attenuated Property Rights
• Completely specified
• Exclusive
• Transferable
• Enforceable and enforced
Property Rights and Economic Efficiency
 Efficiency conditions: Production/consumption, MB = MC
 Specification, transfer, and enforcement must be carried out to perfection but are also very
costly
 Transaction costs
Nonattenuated property rights ensure Pareto –efficiency.
In a more realistic economic model, Pareto – efficiency can be achieved if, in addition to all the other
necessary and sufficient conditions, the investment in specification, transfer, and enforcement of property
rights proceeds to the point at which the marginal conditions for efficiency are satisfied.
Coase Theorem
-When property rights are fully specified, assigned, transferable, divisible and secure, transaction costs are
zero.
Property Rights and Institutions
 Institutions are the “going concerns” that order the relationships among individuals in society. ( John
R Commons) Laws, constitutions, traditions, moral and ethical structures, customs.
 Market
Institutions of one kind or another direct, control, restrain, or at least influence almost every activity and
interpersonal relationship in a complex modern society.
Institutions defines the “rules of the game”.
Help define the structure of incentives facing the individuals.
Property rights are just one facet of a total institutional framework.
Although any specification of nonattenuated property rights may lead to efficiency, many possible
specifications will be at variance with the moral and ethical value system of society.
Envision property right as a bundle of sticks.
 Each stick represent a right.
 Different forms of ownership are different collection of sticks.
How is property held? Who has rights of use?
 Private property
 Common property
 Open access (res nullius)
 Public property
Private property
 Rights and limits to rights are clear
 Rights are enforced
 Rights are transferable
 Rights are exclusive, involves no sharing of natural resources
Most common type of private ownership is
Fee simple – the most complete ownership interest
 Right to possess and use
 Right to sell
 Right to lease
 Right to mortgage
 Right to subdivide
 Right to easements
 Right to devise
Common property
 Rules are clear, exclusive, transferable, enforced
 Held by group of individuals, formalized into very specific share agreements
Open access
 Represents a lack of property rights or ownership
 Completely non-exclusive, no one can be prevented from using or exploiting the natural resource
 Leads to the most serious problems in natural resource use
Public Property
There is a governmental institution such that the four properties of non-attenuated property rights are [ought
to be properly] put in place.
Rights Reserved for Government
 Right to tax (somebody has to pay for the enforcement)
 Right to take for public use (eminent domain)
 Right to control the use (police power)
 Right to escheat (reverting of property to the state when a
 Person dies without heirs, will or trustee)
This is not government acting on its own, but as protector of the rights of others.

Eminent Domain
 Condemnation, to take the resource (e.g. land) for public use. It is used to generate a public good,
providing benefit.
 There is compensation
Police Power
 Control of resource use (e.g. land) to protect public health, safety, morals and general welfare - to
prevent a public bad, i.e. preventing harm
 Based on common law doctrine of nuisance – nobody has the right to do anything that will harm
others
 No compensation
Externalities as a Source of Market Failure
Recall…
Characteristics of an efficient property rights structure
1. Exclusivity Frequently violated in practice
2. Transferability
3. Enforceability
Externality
 An externality exists whenever the welfare of some agent, either a firm or household, depends not
only on his or her activities, but also on activities under the control of some other agent.
 The increased waste in the river imposed an external cost on the resort, a cost the steel firm could not
be counted upon to consider appropriately in deciding the amount of waste to dump.

1. The output of the commodity is too large.

2. Too much pollution is produced.
3. The prices of products responsible for pollution are too low.
4. As long as the costs are external, no incentives to search for
ways to yield less pollution per unit of output are introduce
by the market.
5. Recycling and reuse of the polluting substances are discouraged
because release into the environment is so inefficiently cheap.

The effects of a market imperfection for one commodity end up affecting the demands for raw materials,
labor, and so on. The ultimate effects are felt through the entire economy.
Other Property Rights Regimes
Common-property resources are those shared resources that are managed in common rather than privately.
Open-access resources can be exploited on a first-come, first-served basis because no individual or group
has the legal power to restrict access.

Common-pool resources are shared resources characterized by non-exclusivity and divisibility.

Non-exclusivity implies that resources can be exploited by anyone, while divisibility means that the capture
of part of the resource by one group subtracts it from the amount available to the other groups.
Two characteristics of this formulation of the open-access allocation are worth noting: (1) In the presence of
sufficient demand, unrestricted access will cause resources to be overexploited; (2) the scarcity rent is
dissipated; no one is able to appropriate the rent, so it is lost.
Unlimited access destroys the incentive to conserve. A hunter who can preclude others from hunting his
stock has an incentive to keep the herd at an efficient level. This restraint results in lower costs in the form
of less time and effort expended to produce a given yield of bison. On the other hand, a hunter exploiting an
open-access resource would not have an incentive to conserve because the potential additional economic
surplus derived from self-restraint would, to some extent, be captured by other hunters who simply kept
harvesting.
Thus, unrestricted access to resources promotes an inefficient allocation. As a result of excessive harvest
and the loss of habitat as land was converted to farm and pasture, the Great Plains bison herds nearly became
extinct (Lueck, 2002).
Public goods
 Those goods that exhibit both consumption indivisibilities and non-excludability.
Non-excludability refers to a circumstance where, once the resource is provided, even those who fail to pay
for it cannot be excluded from enjoying the benefits it confers.
Consumption is said to be indivisible when one person’s consumption of a good does not diminish the
amount available for others.
Free rider
Is someone who derives the value from a commodity without paying an efficient amount for its supply.
Inefficiency results because each person is able to become a free rider on the other’s contribution.
Imperfect Market Structures
Environmental problems also occur when one of the participants in an exchange of property rights is able to
exercise an inordinate amount of power over the outcome.
This can occur, for example, when a product is sold by a single seller, or monopoly.
It is easy to show that monopolies violate our definition of efficiency in the goods market.
According to our definition of static efficiency, the efficient allocation would result when OB is
supplied.
This would yield consumer surplus represented by triangle IGC and producer surplus denoted by
triangle GCH.
Monopolies supply an inefficiently small amount of the good.
Imperfect markets clearly play some role in environmental problems. For example, the major oil-exporting
countries have formed a cartel, resulting in higher-than-normal prices and lower-than-normal production.

A cartel is a collusive agreement among producers to restrict production and raise prices. This collusive
agreement allows the group to act as a monopolist.

Government Failure
Market processes are not the only sources of inefficiency. Political processes are fully as culpable. Some
environmental problems have arisen from a failure of political, rather than economic.
Government failure shares with market failure the characteristic that improper incentives are the root of the
problem. Special interest groups use the political process to engage in what has become known as rent
seeking.
Rent seeking is the use of resources in lobbying and other activities directed at securing protective
legislation. Successful rent-seeking activity will increase the net benefits going to the special interest group,
but it will also frequently lower the surplus to society as a whole.

Basic Ecology for Environmental Economics II

Marine habitats
Marine habitats can be divided into coastal habitats & open ocean habitats
• The marine environment supplies many kinds of habitats that support life.
• Marine life partially depends on the saltwater that is in the sea.
 Marine habitats include:
 coastal zones
 intertidal zones
 sandy shores
 rocky shores
 mudflats
 swamps and salt marshes
 estuaries
 kelp forests
 Seagrasses and coral reefs.
• In the open ocean there are surface waters, deep sea and sea floor.
• Marine habitats can be modified by their inhabitants.
• Some marine organisms, like corals, kelp, mangroves and seagrasses, are ecosystem engineers, which
reshape the marine environment to the point where they create habitats for other organisms.
Mudflats form when mud is deposited by tides or rivers.
 Only occur where the shore is protected from waves.
 Serve to protect coastal lands from the eroding forces of nature and also provide an important habitat
for shore birds
Swamps and wetlands is an area of land permanently saturated, or filled, with water formation of these
swamps begins with bare flats of mud and sand that are thinly covered by seawater during high tides.
MANGROVES are where animals live that feed on fallen leaves and other material.
Crabs, conchs, and other shellfish are abundant in mangrove swamps.
The swamps are also home to a huge variety of birds, whose droppings help fertilize the swamp.
“Nurseries of the ocean”
Swamps are among the most valuable ecosystems on Earth. They act like giant sponges or reservoirs during
floods.
Swamps also protect coastal areas from storm surges that can wash away fragile coastline.
The swamp ecosystem also acts as a water treatment plant, filtering wastes and purifying water naturally.
Estuary
 Is an area where a freshwater river or stream meets the ocean
 The salty ocean mixes with a freshwater river, resulting in brackish water
 Water level and salinity rise and fall with the tides and season
 Many plant and animal species thrive in estuaries.
 The calm waters provide a safe area for small fish, shellfish, migrating birds and shore animals.
 The waters are rich in nutrients such as plankton and bacteria.
 Decomposing plant matter, called detritus, provides food for many species.
 Estuarine crocodiles
 Played a significant role of the start of civilization
 Current practices: Land reclamation on or along estuaries, pollution (runoff from agri) = low fishing
catch, at risk during tsunamis
 Overfishing ex. Japan and Bluefin tuna
Kelp Forest
 Are underwater ecosystems formed in shallow water by the dense growth of several different species
known as kelps
 Though they look very much like plants, kelps are actually extremely large brown algae.
 Kelp are large brown algae that live in cool, relatively shallow waters close to the shore.
 Provide food and shelter for thousands of fish, invertebrates, and marine mammal species.
 Many organisms use the thick blades as a safe shelter for their young from predators or even rough
storms.
 Among the many mammals and birds that use kelp forests for protection or feeding are seals, sea lions,
whales, sea otters, gulls, terns, snowy egrets, great blue herons, cormorants, and shore birds

Coral Reefs
 “The rain forests of the seas.”
 Corals live with algae in a type of relationship called symbiosis. This means the organisms cooperate
with each other.
 The algae, called zooxanthellae, live inside the corals, which provide a tough outer shell made from
calcium carbonate.
 In return for that protection, the algae provide their host with food produced through photosynthesis.
 Zooxanthellae also provide corals with their striking colors.
 Scientists estimate that 25 percent of all marine species live in and around coral reefs, making them one
of the most diverse habitats in the world.
 They act as productive nurseries to many fish species, giving the small fish a home and a chance to grow
 Provide a variety of economic benefits, including recreational activities, tourism, coastal protection,
habitat for commercial fisheries, and preservation of marine ecosystems
 “Corals are important to us for many reasons,”... “From a practical point of view, they can help protect
coastlines from storm events, for instance, and help maintain fisheries that are essential to a lot of
people. And complex compounds found in coral reefs hold promises in modern medicine. These are
what we call ecosystem services that would be very difficult and expensive to replace.”
 Temperature = warmer water
 Acidic oceans = acidifications makes it difficult for corals to harden their exoskeletons
 Rising carbon dioxide levels = lower pH =

Freshwater Habitats
 water covers 70% of our planet
 Only 3% of the world’s water is fresh water, and two-thirds of that is tucked away in frozen glaciers or
otherwise unavailable for our use.
 Clean freshwater is a luxury in many parts of the world.
 Two million people, mostly children, die each year from water born diseases alone.
 Freshwater ecosystems account for less than 0.01% of the planet’s total surface area but they support
more than 100,000 species
 Freshwater systems are now among the most endangered habitats in the world, due to human
development, pollution and climate change.
1. Lakes

2. Rivers
Basic Ecology for Natural Resource and Environmental Economics
Terrestrial Communities
Tropical Forest
 Annual rainfall exceeds 240cm a year
 Average temperature is more than 17 degrees C
 23% of the world’s land area
 20% of the world population
 More than 50 species of trees per hectare
 Rain forest trees are often smooth barked and have large oval, waxy leaves narrowing to “drip tips” at
the apex so that rainwater drains quickly from the fronds.
 Many trees have shallow roots with buttresses for support
 Trees can grow as much as 60 meters
 Little light penetrates the canopy
 Many epiphytes
 Animals are diverse, important for pollinating flowers and dispersing fruits and seeds
 Great reservoirs of biodiversity in the planet
 Large mammals are not common
Temperate Forests
 Occupy mid-latitude regions and dominated by evergreen and deciduous trees
 Occurs in regions where the temperature falls below freezing each winter, but not usually below -12
degrees C
 Annual rainfall is between 75 and 200 cm
 United States, East Asia and Europe
 Commonly leaves are shed in the fall and reappear in the spring
 Species diversity is much lower compared to the tropics
 Oaks, hickories, maples are dominant in United States
 Soils are richer because leaves (detritus) are not quickly decomposed
 Animals adapted to such climate: mammals hibernate, birds migrate, insects enter diapause
 Not good for reptiles
 Wolves, squirrels, bears, foxes, bobcats…
Desert
 Biomes suffering from deficit of water
 They are found in between the latitudes of tropical forests and temperate forests
 About 1/3 of the earth’s terrestrial surface
 Characterized by: paucity of water and high daytime temperatures
 Cold deserts: lacking cloud cover, very cold at night
 10% or less in sand surface is covered with plants
 Three (3) forms of plants adapted in deserts
 Annuals- growing only when there is rain
 Succulents – store water
 Shrubs – short trunks, numerous branches, and small thick leaves
 Plants have spines or aromatic/ unpleasant smells
 To conserve water, plants produce many small seeds
 Many common seed-eaters
 Reptiles are numerous
 Deserts can be good for agriculture if it is irrigated
 Rapid rate of evaporation bring salts to deeper layers of the soil which inhibits plant growth
Grasslands: prairie and savanna
 Occur in the range between desert and temperate forest
 Rainfall ranges from 25 to 75 cm- too low to support a forest but is higher than necessary to support only
desert life-forms
 Prairies- temperate grasslands
 Savanna- tropical grasslands
Taiga
 Coniferous forest •
 Most trees are evergreens or conifers with tough needles that may persist three to five years before being
replaced by new needles.
 Spruce, firs, pines
 Trees are highly tolerant to freezes and can withstand temp of – 60 degrees C
 Soils are poor because the fallen needles decay slowly in cold temperatures
 Cyclical populations like hares and lynx
Tundra
 Occupy 17 percent of the earth’s surface
 Exist in the northern hemisphere, north of the taiga
 Precipitation is less than 25 cm per year
 Often locked up in snow, largely unavailable to plants
 Trees cannot grow due to lack of available water
 Water lies in shallow lakes, ponds
Economic Theory Overview and review
The emergence of natural resource and environmental economics (Bromley 2008)
 The development of the field through the merging of natural resource economics and environmental
economics
 Evolved practice of bringing nature into economic models
 Coincident development of welfare economics benefit-cost analysis
 The gradual emergence of a parallel field, ecological economics

Reasons why natural resource economics is studied separately

1. A large set of policy issues concern natural resources
2. Natural resources have unique features generally found in other economic topics
3. Externalities are pervasive in the use of natural resources
4. Natural resources economics emphasizes economic dynamics and decision – making in an intertemporal
setting
Property rights and natural resource use
A property right is a bundle of characteristics that convey certain powers to the owner of the right
Example: a deed to a piece of land
 Private property rights vs Common property rights
 “exclusivity”
 Open access resources
 Ownership and regulation
Welfare Economics and the Role of the Government
Welfare economics is the study of the level of distribution of individuals’ and group’s well-being in the
economy.
 Social welfare function – a hypothetical relationship that weighs each individual’s well-being or utility
in some fashion, then “adds up” the utilities to obtain an aggregate function that is used to compare
alternative equilibria.

 Pareto optimal allocation is one in which it is

not possible to reallocate resources and improve
the welfare of any one person without making at
least one person worse off.
 Producer and Consumer surplus are measures of
people’s utility and firms’ profits, which are used
often as an approximation of social welfare.

Decision Making Over Time

 Natural resources involves decision making over time
 Examples : gold extracted this year versus next year
 Fish harvest this year or no harvest at all
 Depletion of nonrenewable resources or changes in renewable resources
 Intertemporal analysis
 Interest rate
 Compounding
 Discounting
 Present value