Chapter 9: Property
Thomas J. Miceli Introduction The concept of property is fundamental to both law and economics. The law defines and protects the bundle of rights that constitute property, thereby creating the legal framework within which resource allocation and wealth distribution take place. The economic approach to property law emphasizes its role in promoting an efficient allocation of resources. Accomplishing this goal generally involves creation and protection of individual rights in property so as to encourage exchange and investment, though, in some cases, transaction costs, scale effects, or other factors may favour third party or collective control of property rights. The purpose of this entry is to show how legal rules define and protect the efficient property rights regime. The discussion begins with the fundamental problem of assigning property rights. It then turns to an examination of legal rules governing transfers (voluntary exchange) and violations (involuntary exchange) of property rights. The theme is that these rules are designed to minimize the impact of transaction costs and uncertainties about ownership. The final topic concerns the optimal scale of ownership: when is efficiency served by individual ownership and when by common or collective ownership? The principal trade-off is between the incentives of private ownership and the scale economies of common ownership. Origin and assignment of property rights In a seminal article on the emergence and function of property rights, Demsetz (1967) pointed out the fundamental link between property rights and externalities. Externalities are defined to be costs or benefits that one party imposes on...
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