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2 Characteristics of Property Rights

Ownership of property is an everyday fact of our society, yet it is rarely that we think about the different types of ownership that exist. We can have a piece of clothing, a block of land, or we can buy a fishing licence, and in each case we may think of ourselves owning something. In practice however our ownership is markedly different for each. We use a property rights framework to understand the different types of ownership, and how they affect behaviour. Property rights are broader than ownership, and the use of the term is not intended to convey ownership in a narrow legal sense.

We can define 'property' pretty much as anything that we find useful. Property can be something tangible, such as the piece of clothing or land. It can also be intangible, such as ideas and intellectual property [For example Johnny Wilkinson is said to be trademarking his characteristic kicking stance.] . We establish rights over that property - hence 'property rights'. The rights operate in a number of dimensions - such as the ability to prevent someone else using the property, to sell it, to use it in various ways etc. Our rights to a chattel such as a piece of clothing is the closest to a pure set of property rights, as we can use the clothing as we wish, prevent anyone else from using it, and dispose of it as we see fit. In the case of freehold land we hold "Estate in Fee Simple". This gives us a bundle of rights to the land, which allows us to use the land in a number of ways, largely to dispose of it as we see fit, and mostly exclude people from it. The fishing licence gives us a right to use the fishing resource, but we can't exclude anyone else with a licence from doing so, and we can't sell the licence to anyone else.

The key issue with a property rights framework is that it is not the property which is owned, it is the rights to use the property which is owned. The nature of the rights that we have to the property determine the way that we use it. Importantly because property rights distinguish the rights of an individual from the rest of society, they have scarcity and therefore value.

There are four broad types of property - private, common, public and open access. We can define these according to the ability to control access and management of the property as shown in Table 1 below. Problems arise with property which is not owned or managed by an entity. Because no-one can be excluded the intensity of use can rise to the point where the resource is destroyed - the so called "tragedy of the commons". Economists consider therefore that the establishment and vesting of property rights over a resource is a more efficient means of management than open access, even though it may fully or partially alienate the resource from parts of the community.

Table 1: Types of property ownership [From Guerin, 2002.]

  Owner Example Access Management

Private

Private

Freehold land

By owner

By owner

Common

Group

Common land

By joint owners

By joint owners

Public

State

National Park

State

State

Open access

No-one

Open ocean fishery

Uncontrolled

None

The characteristics of the property right are of key importance in the way the resource is managed by the right holder. For example a short duration property right does not encourage a long term view of investment in and sustainability of the resource because the owner has to extract maximum value from the resource in a shorter period of time, and this may lead to management strategies which differ from those of a rights holder who is able to extract value over a longer period of time.

Johnson (2003) reviewed the conceptual frameworks for addressing property rights. He describes frameworks such as that of "attenuation" and "efficiency" in property rights. The concept of attenuation is based on property in an ideal, unattenuated state, such as private chattel ownership. The owner has completely free rights of use, exclusion of all others, to any use, and complete alienation. Any attenuation of the rights of the owner from this state will reduce the value of the property.

The concept of efficiency of property rights takes into account the costs of negotiating rights, the costs of policing, the costs of establishment, and the costs of litigation. The set of property rights which minimises these costs is an efficient set. In this context Anderson and Hill (1975) note the way that willingness to invest in the development and protection of property rights in the American West varied with competition for the resources and technology [Such as barbed wire which enabled low cost fencing of previous rangeland.] which enabled their protection.

Guerin (2002) uses a detailed breakdown of property rights based on Scott (1988). The characteristics of the property rights of key interest are:

  • flexibility: the extent to which the owner can change the mode or purpose of resource use without forfeiting the right
  • divisibility - the ability to create joint ownership, to divide the asset spatially or by function, to construct temporal succession of rights
  • quality of title - enforceability, certainty, security, ease of establishing ownership. Defines how secure the property holder can feel that the specified property will continue to be available in the future
  • exclusivity - specificity, excludability, how many other parties to agree with on use
  • duration - permanence, length and arrangements for renewal
  • transferability - assignability, exchangeability, tradability.

These categories are not completely independent or exclusive. For example the value of all the other characteristics is enhanced as duration increases (Scott 1988), and an increase in flexibility enhances the value of divisibility and transferability. The aim of a property rights regime is to maximize the incentives for property owners to maximize the long term value of the resource. This produces the most efficient outcome for society. Conceptually using the Scott approach the incentive for long term efficient management of the resource are maximized when the right exists in perpetuity, is completely flexible, certain and secure, can be simply and costlessly transferred, and where others can be completely excluded from the use of the right.

Note that the aim is to maximise the property owners' efficiency of decision making, which relates essentially to private goods. Water, as with many other property types, is subject to both public and private rights. The private property right must therefore be structured within a framework which takes into account the externalities which the use of the resource may generate to other stakeholders' rights.

The following section describes the framework for property rights and water quality in New Zealand.

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