The optimal scale of ownership: private versus common property
The discussion so far has focused primarily on private, or individual, ownership of property rights. There are certain circumstances, however, in which common, or public, ownership of rights might be optimal.
The difference between private and common ownership is that, under the latter, all individuals in the community can exercise the rights of ownership. That is, members of the community cannot be excluded, whereas members outside the community can be. (Common ownership is thus a ‘restricted access’ property regime, as opposed to an ‘open access’ regime where no one is excluded: Lueck, 1994; Anderson and Swimmer, 1997.) In contrast, under private ownership, the individual has the right to exclude all others from use of his or her property. (Private ownership is thus an extreme case of restricted access.) The primary disadvantage of common ownership stems from externalities - the fact that individual users will not take full account of the effects of their activities on other users. At the same time, common ownership can offer advantages associated with scale economies and risk sharing. The optimal scale of ownership involves a balancing of these effects.Private versus common ownership of land
Demsetz (1967) made the seminal argument for private ownership. When land is communally owned, each member of the group will have an incentive to overwork it because he or she does not bear the full costs of doing so. As a result, the resource value of the land (its fertility, stock of game or deposit of minerals) will be diminished too quickly (Hardin, 1968; Cornes and Sandler, 1986, pp. 128-31). Negotiation among the members of the group and/or efforts to limit the number of users can curtail this tendency (Ostrom, 1990), but that involves the cost of negotiating multiple agreements and of policing those agreements. In contrast, individual ownership of land results in efficient use of parcels, since owners will fully internalize the costs and benefits of their activities.
(See Anderson and Lueck, 1992, and Besley, 1995, for empirical evidence in support of this proposition.)Of course, externalities remain under private ownership, as when the actions of individual owners spill over onto neighbouring parcels. Again, these effects can be resolved through Coasean bargaining. However, one expects that the costs of bargaining will be considerably lower under individual ownership since only those owners whose parcels are affected by the spillover need bargain. In contrast, all members of the group must participate in any bargain under common ownership since none can be excluded from use of the property. Further, private ownership allows another solution to externalities, namely, consolidation of parcels affected by spillovers. In some cases this will be a lower-cost way to internalize externalities compared to bargaining; it depends on the costs of bargaining compared to the scale economies and governance costs associated with consolidation (Coase, 1937).
Still, common ownership offers some advantages over private ownership. This is true for goods whose consumption is non-rivalrous or public and for large-scale externalities (Ellickson, 1993, pp. 1334-5). In these situations, multilateral bargaining is prohibitively costly, and the scale of the externality is too large to make consolidation into single ownership desirable. Thus some level of public ownership may be the least-cost option. This typically requires coercion by the governing body to prevent free-riding by members of the group (governance costs), as when taxes are raised to provide public goods, and expenditure of resources to enforce the boundaries of the common (exclusion costs) (Field, 1989; Ostrom, 1990; Lueck, 1994, 1995; Anderson and Swimmer, 1997).
Publicness represents a technological basis for group ownership. Two other reasons are based on preferences. The first is the desire of owners to spread the risk that their land may be damaged or unproductive (Ellickson, 1993, pp.
1342-4). A sole owner bears the entire risk, whereas under group ownership the risk is spread across all members since no individual’s return is tied to a particular parcel. Of course, this approach to sharing risks is not ideal because it may create a tradeoff between risk sharing and incentives. Thus we would expect group ownership to decline in importance as other methods for sharing risks such as insurance markets are developed.A final reason for communal ownership of land is a group’s preference for egalitarianism, or equal sharing of wealth among its members. This represents a case where private (as well as public) goods are publicly owned. As a consequence, Ellickson (ibid., p. 1351) notes that pursuit of egalitarianism ‘increases the need for pervasive controls against shirking, and may prompt the most skillful workers to consider greater rewards outside the commune’. Indeed, Cosgel et al. (1997) argue that the optimal scale for equal sharing of wealth within communal societies may be limited by consideration of these factors.
Temporal division of ownership
Common ownership is a form of divided ownership in which all members of the group possess rights in the object at a point in time. Property rights can also be divided through time, as in the case of leases. However, incentives for inefficient use exist under temporal division as well (Epstein, 1986, pp. 70710; Miceli et al., 2001b; Posner, 2003, pp. 71-5,). For example, tenants will not internalize the full costs and benefits of their actions since their rights to the property are limited in time (and possibly scope). The allocative costs of dividing ownership, however, may be offset by the benefits, one of which is specialization. For example, a lease allows landlords to specialize in bearing the risk of changes in the market value of property, and tenants to specialize in combining labour and capital inputs with land to produce output.
Modern landlord-tenant law has redefined the obligations of parties to residential leases by increasing the rights of tenants relative to landlords (Hirsch and Law, 1979; Rabin, 1984).
The Coase theorem and its corollaries suggest that this trend may enhance efficiency (rather than being merely redistributive) if transaction costs between landlords and tenants in residential settings have become high enough to preclude bargaining and if tenants value the rights more than landlords (Posner, 2003, pp. 484-5).Property rights in information
Information has the characteristics of a public good because the cost of producing it does not increase in proportion to the number of consumers. Thus information would seem to be well-suited to public or common ownership. This assignment of rights, however, would likely lead to too little production of new information because producers would have difficulty appropriating its full social value. At the other extreme, assigning exclusive rights in information to its producer would limit its use if it is costly for those who value information to locate and bargain with the producer. This is the basic tradeoff involved in assigning property rights in information.
Patent law addresses this tradeoff by awarding innovators exclusive rights to an invention for a limited period of time (17-20 years) (Kitch, 1977). Similarly, a copyright is granted to the creator of an original idea, but that right is also limited in duration (the creator’s life plus 50 years in the United States) and scope (quotations and limited copying for educational rather than commercial uses are generally allowed under fair use) (Landes and Posner, 1989).