Who Owns It, and Why Does It Matter?

Start Here: Nobody Washes a Rental Car

An old saying holds that nobody has ever washed a rental car. People drive their own cars more gently, keep up the oil changes, and fix small dents before they rust. The car is the same. What differs is who pays for neglect and who gains from care. That difference is what economists mean by property rights.

An Old Idea

Philosophers made two arguments for property long before economics existed. Around 350 BC, Aristotle warned against holding everything in common: “what is common to many is taken least care of; for all men regard more what is their own than what others share with them in.” That is an argument about results. Property gets better care.

In 1689 the English philosopher John Locke made a different kind of argument. Every person owns his own labor, he wrote, so whatever someone “hath mixed his labour with” from nature becomes “his property.” He added a condition, now called the Lockean proviso: this holds “at least where there is enough, and as good, left in common for others.” That is an argument about rights. Aristotle asks whether property works. Locke asks whether it is fair. Economics can test the first question. The second is a question of values, and this sheet keeps the two apart.

What a Property Right Is

Economist Armen Alchian defined a property right as “the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals.” For private property, he named three basic elements: “(1) exclusivity of rights to choose the use of a resource, (2) exclusivity of rights to the services of a resource, and (3) rights to exchange the resource at mutually agreeable terms.” In plain words, these are the right to decide how something is used, the right to keep what it earns, and the right to sell it.

Notice that someone always decides. A resource can be privately owned, run by a community under shared rules, owned by government, or open to anyone. The economic question is not whether there are rights but who holds them and what that does to their incentives.

Each way of holding a resource answers the same questions differently.

Four Things Property Rights Do

1 Care: Who pays for neglect?

When no one owns a resource, no one has a reason to save it. Alchian’s example was a fishery: “a fisherman who throws back small fish to wait until they grow is unlikely to get any benefit from his waiting. Instead, some other fisherman will catch the fish.” In 1968 the biologist Garrett Hardin called this the “tragedy of the commons.” Each herder on a shared pasture gains the full benefit of adding one more cow but bears only a small share of the damage, so the pasture is overgrazed. As Hardin later summed it up, “an unmanaged commons in a world of limited material wealth and unlimited desires inevitably ends in ruin.”

2 Looking ahead: Who gains from the future?

An owner who plants trees, fixes a roof, or improves a business gains when the asset becomes more valuable, even if he sells it before the trees are grown. That gives owners a reason to think about the future. Alchian contrasted this with a Soviet farm manager who could have earned the farm a large profit by shipping wheat to Moscow before it rotted. Because no one on the farm could keep any of that profit, the manager was more likely “to go home early and let the crops rot.”

3 Peace: How do we settle who gets what?

Every society has to decide who controls scarce things. Without clear rights, the answer can come from force. Alchian put it this way: “Well-defined and well-protected property rights replace competition by violence with competition by peaceful means.” Instead of fighting over land, people bid for it, rent it, or make something better with it.

4 Trade: Can it be bought and sold?

Trade and prices need rights that can change hands. You can’t sell what you don’t own, and without sales there are no prices to guide anyone. Where resources are not for sale, Alchian noted, people who “think they can put the resources to more valuable uses cannot do so by purchasing the rights because the rights are not for sale at any price.” This is the link from the Trade reading to the Supply and Demand reading that comes next.

WATCH The Tragedy of the Commons (Marginal Revolution University)

Where Property Rights Come From

Rights are not handed down all at once. Economist Harold Demsetz argued in 1967 that “property rights tend to develop where the gains from defining and enforcing those rights exceed the costs.” His example drew on research about Indigenous hunters in Labrador, in what is now Canada. They had no property rights in hunting grounds in the mid-1600s but did by the early 1700s. What changed was the fur trade. Once beaver pelts could be sold to European traders, beavers became worth protecting from overtrapping.

Ronald Coase, who won the 1991 Nobel Prize, asked what happens when one person’s use of property harms another’s. If a right is well defined, can be traded, and bargaining costs nothing, then the outcome “does not depend on whether the right was initially allotted to one party or the other,” because the parties will bargain to the best use. But bargaining is never free. Coase concluded that these “transaction costs” help explain why we have firms, contracts, and laws.

WATCH The Importance of Institutions (Marginal Revolution University)

What Economics Adds

LISTEN Shampoo, Property Rights, and Civilization (with Anthony Gill) on EconTalk, hosted by Russ Roberts, with a transcript

Key Terms in Plain Words

Property right

The authority to decide how a resource is used, to keep what it earns, and to sell it.

Private property

A resource controlled by a person or firm that bears the costs and reaps the rewards.

Open access

A resource anyone can use and no one controls, such as fish in the open ocean.

Common-pool resource

A shared resource, such as a pasture or groundwater, that users can deplete.

Tragedy of the commons

Overuse of an open-access resource because each user bears only part of the cost.

Lockean proviso

Locke’s condition that taking from nature is fair if “enough, and as good” is left for others.

Externality

A cost or benefit that falls on someone outside the decision, such as smoke on a neighbor.

Transaction costs

The costs of finding, bargaining with, and enforcing deals with others.

Title

A legal record showing who owns an asset, which lets it be sold or borrowed against.

Dead capital

De Soto’s term for assets that can’t be sold or borrowed against because the law doesn’t record them.

Eminent domain

Government’s power to take private property for public use, with just compensation.

Patent

A time-limited exclusive right to make and sell an invention.