Transactions costs and the partitioning of rights
Transactions costs will seldom be zero under real-world conditions. It may be costly to provide information on product qualities in order to identify profitable production opportunities or exchange partners.
Furthermore, any bargaining requires time and other resources to be spent, as well as, at a later time, costs to monitor and enforce the keeping of the contract. With transactions costs being positive, property rights will never be fully defined since individuals will have to bear costs in order to establish exclusive rights and to exploit the full potential of a formally owned resource. As long as the definition of property rights is costly, the degree of rights delineation will depend on an individual cost-benefit calculus of the affected parties. As a well- known theorem of Demsetz (1967) states, exclusive property rights will be established when net gains from exclusivity are positive. Since perfect delineation of rights will be prohibitively costly, there will always be domains with property rights being absent and, hence, public.Moreover, even when rights are formally assigned to private owners, entitlements, owing to a similar calculus of gains and costs of enforcement, may be attenuated: asset proprietors will find it worthwhile to claim their ownership rights as long as marginal benefits exceed marginal costs (Demsetz, 1964; Barzel, 1989, pp. 64ff.). As owners, therefore, deliberately abstain from exploiting the entire potential of ‘their’ resource, there will always be an optimal degree of externality leaving some valued attributes placed in the public domain. Shopping centres, for example, often allow for free parking and tolerate non-customers’ use of their parking space (Demsetz, 1964). Shoppers, by making their purchases, produce positive externalities for all non-shopping parkers. The shopping centre may well fence in the parking space and pay a guardian to exclude non-payers by employing a price mechanism. This solution, however, may be disadvantageous even to the shoppers, in that the parking price would have to cover the exclusion costs and might well exceed their marginal valuation of using the parking lot.
Thus even purchasers producing external economies to other users may prefer free parking access for all rather than costly exclusion of free-riders. Another illuminating example is that of restaurant owners who supply their patrons with free salt while overpricing other attributes to cover its costs. Equally, in their pricing schemes they fail to distinguish between fast and slow eaters, although the latter use the provided space and china for a longer period than the former (Barzel, 1989, pp. 66, 72). An unusual pricing device to economize on transactions costs was observed by Cheung (1980) in Hong Kong, where the owners of movie theatres underpriced the better seats in order to get them fully occupied. This allowed them to economize on the costs of price discrimination.There are two main forms of attenuation of property rights (Alchian and Demsetz, 1973, p. 18), the first being decision sharing, with rights held by a group of people who are only able to exercise their entitlements collectively, as is often the case with public ownership. A second important form of rights attenuation consists in the domain partitioning of rights uses by several people. Consider, for instance, a unique piece of land:
A may possess the right to grow wheat on it. B may possess the right to walk across it. C may possess the right to dump ashes and smoke on it. D may possess the right to fly an airplane over it. E may have the right to subject it to vibrations consequent to the use of some neighboring equipment. And each of these rights may be transferable. In sum, private property rights to various partitioned uses of the land are ‘owned’ by different persons. (Alchian, 1977, pp. 132f.)
More on the topic Transactions costs and the partitioning of rights:
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