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4.3  Community limits on property rights[20]

Property rights are not absolute or unchanging (Bromley, 1993). Any property right can be seen to be held subject to a general understanding of the constraints imposed by the community (expressed through judicial interpretation, statutory definition or direct community/peer pressure) with the knowledge that those constraints evolve over time, but that the right will not be unduly altered without consent or compensation.[21] This complex definition of course leaves much open to interpretation.

Alternatively, we can “describe property as the value … left after the inconsistencies between … competing owners” of interrelating property rights are resolved, while recognising that “new conflicts are always arising as a result of a change in … technology, or in public values” (Sax, 1964, p61). These changes can include altered perceptions of what constitutes an externality or spillover effect.

This impact of community perceptions on property rights has also been recognised in the New Zealand context; ie, “the balances in society are constantly changing and the legal rules, therefore, are in need of constant review and adjustment ….. the Government of the day must assume responsibility for assessing changes ….. they will be unlikely to gain broad acceptance until they have been developed through an adequate process, including appropriate consultation.” (Legislation Advisory Committee, 2001, p9).

What constitutes a nuisance or an unacceptable externality created by use of a property right also changes over time. These changes can render what was a legal use (for example, a pig farm now surrounded by primarily residential properties) no longer legal.[22] Who then in effect has stopped that use, and who is liable for the costs of doing so – the affected neighbours or other beneficiaries of the abatement, the courts or the government? Is this a taking where government assumes or assigns control over all or part of a property right (or legal right) held by a private party? Whatever answer a society reaches on that question is ultimately implemented through a local planning process. The vulnerability of any property right to such action will tend to be reflected in its value (see Guerin, 2002 and Wilkinson, 2002).[23]

Local planning or zoning where only certain uses are allowed within a specified area or uses are prohibited except in a specified area, is the single largest restriction on property rights in land. In the USA zoning began as a “scientific” planning process but became “a discretionary system in which developers typically bargained with local government to gain permission to develop” with frequent overtones of corruption. The regularisation of planning as a property right has been suggested but has not occurred to date (Nelson, 1986, p365).

Planning can be seen as a means of maximising the aggregate value of the land within a jurisdiction and of constraining developments that could impose additional expenditure obligations, thereby requiring higher taxes (Fischel, 1999). This can create an equity issue by increasing the cost of housing in the area, with all the benefits going to the existing owners (as new entrants have the increase capitalised in their purchase price). Planning is also a means of addressing those externalities which are not well handled by the Torrens system of titles, including long-term and non-point source degradation (Johnson, 1992).

Another equity issue is the concept of grandfathering existing uses. This reduces the cost of bringing in new controls but creates inequities between existing and future residents, allowing the former to shift the full burden of changes onto the latter (Fischel, 1999). Spillover effects can also be a consequence of planning with undesirable activities excluded, or confined to locations where negative externalities primarily affect other jurisdictions (Fischel, 1999). This can be constrained by higher jurisdictions such as through National Policy Statements (NPSs) under the RMA in New Zealand (see Section 6.1).

4.4  Implementing a rights regime

The rationale for creating new rights regimes is generally to improve the efficiency of use of an underlying resource. Whatever the rationale, however, there are fundamental design issues to be resolved (see Table 5) which can require a significant bedding-in time for a new regime. In particular achieving the necessary quality of title requires detailed design and credible institutions which cannot be achieved overnight.

Those existing property rights that have evolved over time have established interpretations of the property right characteristics discussed above. When Government moves to define or substantially redefine a property right, however, it may have to establish such interpretations from scratch and do so in a manner that provides the owners of the new rights with the appropriate behavioural incentives. Such design must be undertaken with great care to avoid introducing new distortions that outweigh the intended benefits.

Table 5 – Designing new private property rights
General characteristic Detailed Design Issues
Flexibility and divisibility. Transformability of the right (eg, whether right holder can lease all or part of the right for less than its full term).
Exclusivity. Excludability of others from use of the right, and whether use is rival.
Quality of title. Whether the right is to an absolute quantum of resources, or to a proportional share of a pool, and if the latter on what basis the pool is determined.
Whether the owner of the right must be compensated for changes in its value or terms.
Institutions (including information requirements) are required to enforce the right.
Duration. Whether it is permanent, or what the basis is for reallocation and whether the right holder would have any preference for future allocations.
Transferability. The basis for initial vesting of the right.
Whether there are any limits on transferability; eg, to who, at what price, how often.

Source: Scott (1988) and Scott and Coustalin (1995)

As Table 5 illustrates, establishing a rights regime requires going beyond simply defining the right, to establishing a register to record ownership, setting out the roles of government, institutions and individuals, defining conflict resolution arrangements and dealing with impacts on third parties. For some types of right environmental implications are crucial requiring designers to address clear assignment of risks and procedures for compensation, and management of externalities of use (Rosegrant and Gazmuri, 1995). For natural resources in particular, key aspects of the regime include the nature of the long-term entitlement, the periodic allocations for use, and the conditions and obligations attached to use (Young and McColl, 2002).

Once rights have been created, arrangements are also needed to reallocate them to respond to changing demands and opportunities, including resource allocation between competing uses, and ensure secure and efficient trading and administration.[24] Banking of rights for future use, a major issue for environmental trading, also requires knowledge of whether and how entitlements grow or shrink over time and of whether rights expire if not used, and determination of who should own and run the bank (Siebert, Young and Young, 2000).

Markets tend to minimise these costs (relative to administrative allocation) but can result in high third party costs and may not achieve equity objectives. Markets, however, require a legal framework within which to operate. The limited liability and Torrens Title systems (see Section 6.5.2) offer examples of how a robust property regime can improve investment incentives through lowering title search and insurance costs.

Implementation plays a significant role in realising the benefits of a rights regime. Trading in environmental flows of water for example requires, in addition to well-defined rights and explicit trading rules, determination of whether environmental rights are prior to or competitive with other uses of the water and who has authority to manage any environmental rights.

All of the above depends crucially on information, which tends to fall short when it comes to environmental applications. Better environmental data “could dramatically expand the number of situations where a property-rights based approach to pollution control and resource management would be viable” and is a core Government function, although well-designed rights regimes can themselves encourage research by those affected (Esty, 1999, p1539).

Notes

  • [20]This section draws heavily on a previous working paper (Guerin, 2002).
  • [21]A subset of the general problem is when rules change after an investment has been committed based on an existing property right but before it is complete. These transition situations raise the same issues in general as for completed investments.
  • [22]The US Supreme Court in Village of Euclid v Ambler Realty Co in 1962 upheld a zoning change which banned a factory and caused a 75% drop in value, basing the decision on suppression of a nuisance (Epstein, 1999).
  • [23]A recent example of changes in property rights from Australia illustrates this. “The new coastal State Environment and Planning Policy … gives the Government the final word on all major developments along a one kilometre strip of the entire NSW coast. The Government will also be able to scrutinise all developments within 100 metres of sensitive coastal areas, although councils will still have the power of final consent, unless the minister chooses to intervene.” Tide turns against beachfront palaces, Sydney Morning Herald, 29 October 2002
  • [24]The costs of doing so can include identification of opportunities, negotiation or decision on the transfer, monitoring third party effects, infrastructure for conducting and monitoring transfer of rights or the underlying resources, and infrastructure for monitoring third party effects (Rosegrant and Gazmuri, 1995).
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