4  The evolution of property rights

Property rights are not immutable. They appear, evolve and vanish in response to economic, societal and environmental pressures and do so within institutional frameworks which differ geographically and over time. The extent to which a rights structure offers advantages over alternatives eventually decides whether or not it survives.

4.1  Why property rights change

In broad terms, property rights can be said to “develop to internalise externalities when the gains of internalization become larger than the cost of internalization”.[16] Conversely “to make costs and benefits externalities … cost of a transaction in the rights between the parties (internalization) must exceed the gains from internalization” (Demsetz, 1967, p348 and 350).

In other words, when the definition of a new property right is the least costly means of addressing a conflict over access to resources, then a right will tend to emerge. Conversely, when creating a right or maintaining an existing right is too costly, the conflict will manifest through other mechanisms, such as competitive harvesting, which will result in externalities for other users or society in general.[17]

There will be cases where these rights can be established at low cost (either informally or formally) by owners themselves, particularly where only small groups are involved, and cases where for society as a whole the benefits exceed the costs so that the state created and enforces the right. Otherwise no right will emerge.

Three particular factors which can trigger change include technological change (which can make access to resources feasible for the first time, reduced costs of obtaining or processing information or reduce the cost of defining and enforcing rights), new markets (due to technology, reduced trade protection, political shifts), changes in relative factor scarcity, and state intervention to define and enforce property rights in exchange for revenue (Pejovich, 1972).[18] Externalities imposed by land use can also change over time due to changes in community perceptions or the cumulative impact of use, thereby triggering a change in permissible land uses (see Section 4.3).

The level of resources invested in defining and enforcing property rights “will depend upon the marginal benefits and costs to investors” which change as the level of technology, scarcity and access to state power change (Anderson and Hill, 1975, p165).

An example in the Great Plains of the USA was the initial establishment of range rights. As settlement increased and land value rose these rights came under pressure, with moves to control grazing on public land, rules on fencing and laws to allow homesteading. The lack of fencing and low carrying capacity of land also resulted in stronger laws requiring livestock branding and registration of the brands, and joint roundups of stock. Enforcement activity increased when barbed wire reduced fencing costs and then declined when mechanisation reduced horse values (Anderson and Hill, 1975).

Many other examples exist of de facto rights evolving out of community resolution of resource conflicts. Such rights often draw on a level of information and enforcement that the state could not match, but tend to remain less secure than de jure rights unless explicitly recognised in law, at which time the regime becomes more rigid (Schlager and Ostrom, 1992).[19] In the Western USA, the high demand for water in gold mining drove a move from riparian rights (see Section 5.4) to discovery, appropriation and development as a basis for water rights. This approach was then followed for farming in Western states where water was normally scarce (Anderson and Hill, 1975).

Externalities can also exist between governmental jurisdictions. These can be resolved by the same techniques as for situations involving private parties through interventions defined by a higher-level government. These include regulation of the activity, incentives on the governments involved to minimise the effects, private property rights for those involved in the externalities, or rights and duties on the governments involved; ie, public property rights. It has been suggested that private rights enforced through the courts offer greater allocative efficiency, while public rights enforced through existing government structures offer greater administrative efficiency (Ellickson, 1979). This will depend on circumstances.

In most cases a legal framework that allows the parties involved to resolve the situation will be adequate, with the relevant governments becoming involved only in situations where a private resolution is not feasible due to the high transaction costs; eg, because of the number of parties involved, the difficulty of identifying the source or localising the impact of the externality. The same arguments will apply for involvement of a higher-level government versus a number of lower-level governments. Where such a higher-level government is lacking, as for most international externalities, resolution of disputes can be extremely difficult. Agreements such as the United Nations Convention on the Law of the Sea (UNCLOS) or the World Trade Organisation are an attempt to address this problem.

4.2  Private rights to government action

Much of this paper focuses on how governments define and limit enforce existing private rights. It has also been argued that “the development of private rights to government actions constitute the primary mechanism by which new property rights are evolving” (Nelson, 1986, p361). Whether or not this is accepted, the fact that rights have come into existence by this route is unquestionable.

Specific examples of this include (1) transfers, such as welfare benefits and low-cost housing (either public or rent-controlled), (2) regulatory controls, such as utility price controls or occupational licensing (eg, lawyers or taxi drivers), or (3) preferential access to public property, such as the supply of subsidised electricity or irrigation water or use of grazing rights on public land, or (4) zoning of land use (discussed in Section 4.3) (Nelson, 1986). This process can be seen as a form of privatisation.

A prominent form of private rights to government action in the USA relates to access to federal lands, noted under (3) above. Grazing permits are traded almost freely (though the restrictions that do exist and the uncertainty of tenure do limit their value) and the fees are significantly below the economic value of the use. Other examples include coal mining and timber harvesting, and a similar situation has now evolved with respect to tourism concessions such as river rafting. A property right is also evolving in respect of wilderness for hikers, bikers and others with an interest simply in preserving the conservation value of the land (Nelson, 1986).

The above rights have typically evolved from a use permit into a de facto private property right, but without full alienability of the right (Nelson, 1986). This results in a suboptimal situation where others are excluded from the property, and the government is unable to reallocate it, but the owners are themselves unable to fully obtain the benefits from it. Retention of the right may also be subject to regulatory requirements regarding use of the resource which are not consistent with maximising private or social values.