The problem of common property

Inasmuch as, because of transactions costs, property rights are not exclusive, privately perceived benefits and costs will differ from total gains and costs (Furubotn and Pejovich, 1972, p.

Consider first the anarchical case of no property where people de facto hold a ‘right to all’ (Hobbes, 1949, p. 27) that ‘entitles’ each and every person to appropriate whatever he/she wants and as much as he/she is able to get, includ­ing the ‘right’ to take by force goods produced by other individuals (for a formal model of anarchical behaviour, see Bush and Mayer, 1974; Grossman and Kim, 1995). As even in anarchy any ‘right’ has a ‘duty’ as a correlative, a ‘right to all’ cannot accrue to anyone in a multi-person society. Rather, indi­viduals will engage in an appropriation race against each other that Hobbes (1914, p.

Similar problems may arise when property, by its formal definition, is communal. Consider the example of highways that, at least in principle, could be supplied as club goods where free-riders are excluded and market provision is possible (this example is taken from Alchian and Demsetz, 1973, p. 21). However, governments often choose to supply roads as freeways, with each driver being entitled to free access. During rush hours the actual use of the allegedly purely public good day by day exceeds its capacity. In order to avoid congestion, each driver may be willing to pay other persons to use alternative routes during these hours. However, even were such bargainings not prohibitively costly, the communal right system encourages the drivers to have the others pay, for any payer would individually bear the cost of provid­ing a public good the benefits of which are dissipated among all users.

There are many other examples of common-property problems that are government induced and regularly the unintended (and often also unexpected) byproducts of an inefficient distributional intervention. In the case of the so- called ‘merit goods’ (Musgrave, 1987; see Tietzel and Muller, 2002 for a critique from a constitutional-economics perspective), paternalistic govern­ments try to change the market allocation of private or club goods, the demand for which is regarded as being ‘insufficiently low’. Here the state intervenes, for example, by (wholly or partly) subsidizing the market supply of opera performances, building of houses or school lunches or by directly regulating prices to a lower than equilibrium level. In the extent of the price reduction of these commodities, the state intervention amounts to a govern­mental definition of communal property rights to these goods, voluntarily leaving some or all of the goods’ valued attributes in the public domain. From a government’s egalitarian point of view it may be desirable equally to treat private and public goods as free goods. However, the distinguishing feature between communal property rights to free as opposed to scarce resources is that, because of their non-subtractibility, the former remain communal in the consumption process. Thus, in view of a good’s abundance, the establishment of exclusive rights is neither possible nor necessary. In sharp contrast to this, the consumption of scarce resources, owing to their shortage, requires any one rationing procedure defining exclusive rights to them. In a limited world where goods are obtainable at a zero price, rationing will regularly occur in terms of time and other resources spent to appropriate these goods.

The common-property problem is even aggravated if one assumes a dynamic perspective. If a government decides to allocate non-public goods under a communal property regime along with taxation according to the ability-to-pay principle, the correlation between demand and supply of public services is interrupted. From an individual’s point of view, under such a rights arrange­ment, it is worthwhile not only to demand the goods supplied at a higher level than the optimal, but also to press for an expansion of governmental supply of private goods in order to externalize the costs of satisfying private needs. This individually rational cost-benefit calculus, however, leads directly to a collec­tive self-damage. Permanent increase of claims to the budget and, if satisfied, an explosion of government expenditure, will be the consequence (Bonus, 1978, pp. 75ff.). Since this, ceteris paribus, curbs economic efficiency and increases unemployment, benevolent (and vote-maximizing) politicians will hasten to increase the government supply of scarce resources, this time in order to mitigate the social damages induced by their own policy.

It contributes to the explanatory power of the property rights paradigm that it even allows for an analysis of common-property problems when private entitlements are established. Suppose, for instance, an employment relation­ship between an owner-manager of an enterprise and a labour supplier. A twofold exchange of property rights is involved here: first, the entrepreneur acquires a private right to exploit temporarily the agent’s effort; second, the principal delegates some of his (or her) exclusive rights to the use of firm equipment to the agent. Since information and measurement costs of labour efforts often prevent the employee’s compensation being tied either to his (or her) effort or to his marginal product (which, for example, is impossible in the case of ‘team production’ in the sense of Alchian and Demsetz, 1972), fixed-wage contracts are usual substitutes for input- and output-dependent compensation. To the extent that the principal, as a result of prohibitive monitoring costs, is unable to exclude the agent from a misuse of his property rights, the employee has an incentive to appropriate what is offered to him free. Thus, as in the communal rights cases discussed above, the employee may take advantage from pursuing his private interests and externalize the costs on the principal.

Consider for simplicity the case of the principal’s complete inability to monitor the agent’s effort. The ‘tragedy of the commons’ then has two facets: first, by ‘shirking’ (Alchian and Demsetz, 1972) an opportunistic employee may reappropriate the private right to his effort that he has sold to the principal. Since with a fixed-wage contract payment does not depend on his labour supply, he will only provide that level of effort which directly yields intrinsic utility to himself. Any supply of labour exceeding this level would produce external benefits to the principal and would, from the agent’s point of view, amount to paying a 100 per cent tax on the increase in output induced by greater effort (Barzel, 1989, pp. 37f.). A second kind of common­property problem is posed by an agent’s ‘consumption on the job’ (Jensen and Meckling, 1976, pp. 312ff.) by which he appropriates fringe benefits from the firm equipment the principal delegated to him. A managerial agent, for example, may, at the cost of the firm’s owner, derive utility from a larger than optimal computer, from a luxurious company car satisfying his needs for status or from judging secretaries by their appearance rather than their pro­ductivity.