3.3 Property rights
How people use environmental resources is not simply a technological matter, rather it is a result of the institutions governing economic activity. Property rights institutions are especially important when considering policies for achieving sustainable development. Property rights are as fundamental to economics as scarcity and rationality. Property rights include the laws, customs and regulations governing the rights and obligations of individuals and firms to have access to and use the environment. The standard economic model is a private (excludability) property rights economy. Under private property rights any mutually agreed contractual terms are possible although not necessarily supported by government enforcement (eg, illegal transferring of rights).
For decentralised coordination of production and consumption to work efficiently, in a society with diffused knowledge, individuals must have secure private property rights that are tradable at mutually agreed prices with relatively low costs of contracting. There is little disagreement that stronger private property rights are more valuable than weaker private property rights.
Many different types of property rights exist in the economy, including private property, collective property and public property. This broad categorisation is of limited use for analysing systems of property rights. Scott (1996) describes three essential powers enjoyed by a sole owner of land: (1) to manage the land; (2) to dispose of the land by selling, leasing or bequeathing it; and, (3) to appropriate the rent for income flowing from the land. A measurement of the strength of power (ie, the value of property rights) depends on the nature of the property rights in land. In the market we observe that the unit price of a 30-year lease is less than freehold title. Similarly, land differentiated only by the relative threat of land use controls will trade at different prices. It might be considered illegal to open a shop for business on certain days of the year – the effect of this restriction reduces the strength (attenuates) of the private property right.
Greater insights can be gained by viewing property rights as comprising a bundle of rights. For example, a water permit under the Resource Management Act 1991 has a number of strands: (1) water is vested in the Crown; (2) the permit holder may have the freedom to decide when and where to use the permitted quantity; (3) the permit holder may transfer the permit to a subsequent owner of the land; (4) the permit holder may not transfer the permit to another person outside the catchment area; (5) during times of shortage the regional council can impose rationing; and so on.
Continuing with water, the following characteristics give shape to the structure of property rights and in doing so determine their value to water users:
Duration: the length of time a user holds a legal claim against the profit associated with use. Other things being equal, water rights of longer duration are relatively more valuable. Duration is particularly important when asset-specific investments (eg, irrigation infrastructure) are needed to exploit the full economic potential of water.
Exclusivity: refers to the ability of individual users to appropriate the profits associated with their investment and operational decisions. Greater exclusivity more directly aligns profits with costs.
Transferability: rights that are transferable are relatively more valuable. Transferability enables the right to move to its most highly valued use in the market. Moreover, transferability unleashes a dynamic that enables profit-seeking individuals to innovate and develop new and more profitable forms of enterprise.
Transformability: refers to the ability to legally transform the right into a derivative right. Thus a water right of fixed duration – say 30 years – could be leased out to a neighbour on an annual basis. This improves the flexibility of the right – farmer A growing crop Z this year may not require the full water allocation; if transformable into a lease, A could transfer a portion to farmer D who needs additional water to meet the requirements of crop Y.
Quality of title: high quality title is secure and relatively less vulnerable to challenge by other users or government. Higher quality title is relatively more valuable.
For example, in California the market value of a water right held in perpetuity is about 5 times that of an annual lease right (Saliba and Bush, 1987). The price of fishing quota rights in New Zealand varies with quota management area, allowable catch limits and economic variables such as harvesting costs, interest rates and so on (Batstone and Sharp, forthcoming).
In 1934 ranchers in the US were granted rights to forage flows on public lands. Although relatively insignificant in terms of US livestock production grazing is important to rural communities. Competition for rights to forage has increased with the increase in demand for alternative uses – eg, wildlife, retired grazing land – of federal land. In a Coasian world with zero transaction costs and tradable rights, competition would resolve the allocation problem and yield an efficient outcome. For example, conservation groups wanting to exclude cattle from public lands would buy grazing rights from ranchers. External institutions – in this case federal law – do not allow for market transactions of this nature. Egan and Watts (1998) provide an estimate of the risk of appropriation facing ranchers. In 1978 the risk index started at 0.94 and declined steadily through 1994 to 0.23. The real (1992) total loss of grazing value over this period was US$10.9 m.
