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TowardsaTheoryofPropertyRights

HaroldDemsetz

TheAmericanEconomicReview

Volume57,Issue2

May,1967,347-359.

Index

Introduction

TheConceptandRoleofPropertyRights

TheEmergenceofPropertyRights

TheCoalescenceandOwnershipofPropertyRights

Introduction

Whenatransactionisconcludedinthemarketplace,twobundlesofpropertyrightsareexchanged.Abundleofrightsoftenattachestoaphysicalcommodityorservice,butitisthevalueoftherightsthatdeterminesthevalueofwhatisexchanged.Questionsaddressedtotheemergenceandmixofthecomponentsofthebundleofrightsarepriortothosecommonlyaskedbyeconomists.Economistsusuallytakethebundleofpropertyrightsasadatumandaskforanexplanationoftheforcesdeterminingthepriceandthenumberofunitsofagoodtowhichtheserightsattach.

Inthispaper,Iseektofashionsomeoftheelementsofaneconomictheoryofpropertyrights.Thepaperisorganizedintothreeparts.Thefirstpartdiscussesbrieflytheconceptandroleofpropertyrightsinsocialsystems.Thesecondpartofferssomeguidanceforinvestigatingtheemergenceofpropertyrights.Thethirdpartsetsforthsomeprinciplesrelevanttothecoalescingofpropertyrightsintoparticularbundlesandtothedeterminationoftheownershipstructurethatwillbeassociatedwiththesebundles.

TheConceptandRoleofPropertyRights

IntheworldofRobinsonCrusoepropertyrightsplaynorole.Propertyrightsareaninstrumentofsocietyandderivetheirsignificancefromthefactthattheyhelpamanformthoseexpectationswhichhecanreasonablyholdinhisdealingswithothers.Theseexpectationsfindexpressioninthelaws,customs,andmoresofasociety.Anownerofpropertyrightspossessestheconsentoffellowmentoallowhimtoactinparticularways.Anownerexpectsthecommunitytopreventothersfrominterferingwithhisactions,providedthattheseactionsarenotprohibitedinthespecificationsofhisrights.

Itisimportanttonotethatpropertyrightsconveytherighttobenefitorharmoneselforothers.Harmingacompetitorbyproducingsuperiorproductsmaybepermitted,whileshootinghimmaynot.Amanmaybepermittedtobenefithimselfbyshootinganintruderbutbeprohibitedfromsellingbelowapricefloor.Itisclear,then,thatpropertyrightsspecifyhowpersonsmaybebenefitedandharmed,and,therefore,whomustpaywhomtomodifytheactionstakenbypersons.Therecognitionofthisleadseasilytothecloserelationshipbetweenpropertyrightsandexternalities.

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Externalityisanambiguousconcept.Forthepurposesofthispaper,theconceptincludesexternalcosts,externalbenefits,andpecuniaryaswellasnonpecuniaryexternalities.Noharmfulorbeneficialeffectisexternaltotheworld.Somepersonorpersonsalwayssufferorenjoytheseeffects.Whatconvertsaharmfulorbeneficialeffectintoanexternalityisthatthecostofbringingtheeffecttobearonthedecisionsofoneormoreoftheinteractingpersonsistoohightomakeitworthwhile,andthisiswhatthetermshallmeanhere.“Internalizing〞sucheffectsreferstoaprocess,usuallyachangeinpropertyrights,thatenablestheseeffectstobear(ingreaterdegree)onallinteractingpersons.

Aprimaryfunctionofpropertyrightsisthatofguidingincentivestoachieveagreaterinternalizationofexternalities.Everycostandbenefitassociatedwithsocialinterdependenciesisapotentialexternality.Oneconditionisnecessarytomakecostsandbenefitsexternalities.Thecostofatransactionintherightsbetweentheparties(internalization)mustexceedthegainsfrominternalization.Ingeneral,transactingcostcanbelargerelativetogainsbecauseof“natural〞difficultiesintradingortheycanbelargebecauseoflegalreasons.Inalawfulsocietytheprohibitionofvoluntarynegotiationsmakesthecostoftransactinginfinite.Somecostsandbenefitsarenottakenintoaccountbyusersofresourceswheneverexternalitiesexist,butallowingtransactionsincreasesthedegreetowhichinternalizationtakesplace.Forexample,itmightbethoughtthatafirmwhichusesslavelaborwillnotrecognizeallthecostsofitsactivities,sinceitcanhaveitsslavelaborbypayingsubsistencewagesonly.Thiswillnotbetrueifnegotiationsarepermitted,fortheslavescanoffertothefirmapaymentfortheirfreedombasedontheexpectedreturntothemofbeingfreemen.Thecostofslaverycanthusbeinternalizedinthecalculationsofthefirm.ThetransitionfromserftofreemaninfeudalEuropeisanexampleofthisprocess.

Perhapsoneofthemostsignificantcasesofexternalitiesistheextensiveuseofthemilitarydraft.Thetaxpayerbenefitsbynotpayingthefullcostofstaffingthearmedservices.Thecostswhichheescapesaretheadditionalsumsthatwouldbeneededtoacquiremenvoluntarilyfortheservicesorthosesumsthatwouldbeofferedaspaymentbydrafteestotaxpayersinordertobeexempted.Witheithervoluntaryrecruitment,the“buy-him-in〞system,orwitha“l(fā)et-him-buy-his-way-out〞system,thefullcostofrecruitmentwouldbebroughttobearontaxpayers.Ithasalwaysseemedincredibletomethatsomanyeconomistscanrecognizeanexternalitywhentheyseesmokebutnotwhentheyseethedraft.Thefamiliarsmokeexampleisoneinwhichnegotiationcostsmaybetoohigh(becauseofthelargenumberofinteract-

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ingparties)tomakeitworthwhiletointernalizealltheeffectsofsmoke.Thedraftisanexternalitycausedbyforbiddingnegotiation.

Theroleofpropertyrightsintheinternalizationofexternalitiescanbemadeclearwithinthecontextoftheaboveexamples.Alawwhichestablishestherightofapersontohisfreedomwouldnecessitateapaymentonthepartofafirmorofthetaxpayersufficienttocoverthecostofusingthatperson’slaborifhisservicesaretobeobtained.Thecostsoflaborthusbecomeinternalizedinthefirm’sortaxpayer’sdecisions.Alternatively,alawwhichgivesthefirmorthetaxpayercleartitletoslavelaborwouldnecessitatethattheslaveownerstakeintoaccountthesumsthatslavesarewillingtopayfortheirfreedom.Thesecoststhusbecomeinternalizedindecisionsalthoughwealthisdistributeddifferentlyinthetwocases.Allthatisneededforinternalizationineithercaseisownershipwhichincludestherightofsale.Itistheprohibitionofapropertyrightadjustment,theprohibitionoftheestablishmentofanownershiptitlethatcanthenceforthbeexchanged,thatprecludestheinternalizationofexternalcostsandbenefits.

Therearetwostrikingimplicationsofthisprocessthataretrueinaworldofzerotransactioncosts.Theoutputmixthatresultswhentheexchangeofpropertyrightsisallowedisefficientandthemixisindependentofwhoisassignedownership(exceptthatdifferentwealthdistributionsmayresultindifferentdemands).1Forexample,theefficientmixofciviliansandmilitarywillresultfromtransferableownershipnomatterwhethertaxpayersmusthiremilitaryvolunteersorwhetherdrafteesmustpaytaxpayerstobeexcusedfromservice.Fortaxpayerswillhireonlythosemilitary(underthe“buy-him-in〞propertyrightsystem)whowouldnotpaytobeexempted(underthe“l(fā)et-him-buy-his-way-out〞system).Thehighestbidderunderthe“l(fā)et-him-buy-his-way-out〞propertyrightsystemwouldbepreciselythelasttovolunteerundera“buy-him-in〞system.2

Wewillreferbacktosomeofthesepointslater.Butfornow,

1.TheseimplicationsarederivedbyR.H.Coase,“TheProblemofSocialCost,〞J.ofLawandEcon.,Oct.,1960,pp.1-44.

2.Ifthedemandforcivilianlifeisunaffectedbywealthredistribution,theassertionmadeiscorrectasitstands.However,whenachangeismadefroma“buy-him-in〞systemtoa“l(fā)et-him-buy-his-way-out〞system,theresultingredistributionofwealthawayfromdrafteesmaysignificantlyaffecttheirdemandforcivilianlife;thevalidityoftheassertionthenrequiresacompensatingwealthchange.Acompensatingwealthchangewillnotberequiredintheordinarycaseofprofitmaximizingfirms.Considerthefarmer-rancherexamplementionedbyCoase.Societymaygivethefarmertherighttogrowcornunmolestedbycattleoritmaygivetheranchertherighttoallowhiscattletostray.ContrarytotheCoaseexample,letussupposethatifthefarmerisgiventheright,hejustbreakseven;i.e.,withtherighttobecompensatedforcorndamage,thefarmer’slandismarginal.Iftherightistransferredtotherancher,thefarmer,notenjoyinganyeconomicrent,willnothavethewherewithaltopaytheranchertoreducethenumberofheadofcattleraised.Inthiscase,however,itwillbeprofitablefortheranchertobuythefarm,thusmergingcattleraisingwithfarming.Hisself-interestwillthenleadhimtotakeaccountoftheeffectofcattleoncorn.

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enoughgroundworkhasbeenlaidtofacilitatethediscussionofthenexttwopartsofthispaper.

TheEmergenceofPropertyRights

Ifthemainallocativefunctionofpropertyrightsistheinternalizationofbeneficialandharmfuleffects,thentheemergenceofpropertyrightscanbeunderstoodbestbytheirassociationwiththeemergenceofnewordifferentbeneficialandharmfuleffects.

Changesinknowledgeresultinchangesinproductionfunctions,marketvalues,andaspirations.Newtechniques,newwaysofdoingthesamethings,anddoingnewthings-allinvokeharmfulandbeneficialeffectstowhichsocietyhasnotbeenaccustomed.Itismythesisinthispartofthepaperthattheemergenceofnewpropertyrightstakesplaceinresponsetothedesiresoftheinteractingpersonsforadjustmenttonewbenefit-costpossibilities.

Thethesiscanberestatedinaslightlydifferentfashion:propertyrightsdeveloptointernalizeexternalitieswhenthegainsofinternalizationbecomelargerthanthecostofinternalization.Increasedinternalization,inthemain,resultsfromchangesineconomicvalues,changeswhichstemfromthedevelopmentofnewtechnologyandtheopeningofnewmarkets,changestowhicholdpropertyrightsarepoorlyattuned.Aproperinterpretationofthisassertionrequiresthataccountbetakenofacommunity’spreferencesforprivateownership.Somecommunitieswillhavelesswell-developedprivateownershipsystemsandmorehighlydevelopedstateownershipsystems.But,givenacommunity’stastesinthisregard,theemergenceofnewprivateorstate-ownedpropertyrightswillbeinresponsetochangesintechnologyandrelativeprices.

Idonotmeantoassertortodenythattheadjustmentsinpropertyrightswhichtakeplaceneedbetheresultofaconsciousendeavortocopewithnewexternalityproblems.TheseadjustmentshaveariseninWesternsocietieslargelyasaresultofgradualchangesinsocialmoresandincommonlawprecedents.Ateachstepofthisadjustmentprocess,itisunlikelythatexternalitiespersewereconsciouslyrelatedtotheissuebeingresolved.Theselegalandmoralexperimentsmaybehit-and-missprocedurestosomeextentbutinasocietythatweightstheachievementofefficiencyheavily,theirviabilityinthelongrunwilldependonhowwelltheymodifybehaviortoaccommodatetotheexternalitiesassociatedwithimportantchangesintechnologyormarketvalues.

Arigoroustestofthisassertionwillrequireextensiveanddetailedempiricalwork.Abroadrangeofexamplescanbecitedthatareconsistentwithit:thedevelopmentofairrights,renters’rights,rulesfor

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liabilityinautomobileaccidents,etc.Inthispartofthediscussion,Ishallpresentonegroupofsuchexamplesinsomedetail.TheydealwiththedevelopmentofprivatepropertyrightsinlandamongAmericanIndians.Theseexamplesarebroadrangingandcomefairlyclosetowhatcanbecalledconvincingevidenceinthefieldofanthropology.

Thequestionofprivateownershipoflandamongaboriginalshasheldafascinationforanthropologists.Ithasbeenoneoftheintellectualbattlegroundsintheattempttoassessthe“truenature〞ofmanunconstrainedbythe“artificialities〞ofcivilization.Intheprocessofcarryingonthisdebate,informationhasbeenuncoveredthatbearsdirectlyonthethesiswithwhichwearenowconcerned.WhatappearstobeacceptedasaclassictreatmentandahighpointofthisdebateisEleanorLeacock’smemoironTheMontagnes“HuntingTerritory〞andtheFurTrade.3Leacock’sresearchfollowedthatofFrankG.Speck4whohaddiscoveredthattheIndiansoftheLabradorPeninsulahadalong-establishedtraditionofpropertyinland.ThisfindingwasatoddswithwhatwasknownabouttheIndiansoftheAmericanSouthwestanditpromptedLeacock’sstudyoftheMontagneswhoinhabitedlargeregionsaroundQuebec.

Leacockclearlyestablishedthefactthatacloserelationshipexisted,bothhistoricallyandgeographically,betweenthedevelopmentofprivaterightsinlandandthedevelopmentofthecommercialfurtrade.Thefactualbasisofthiscorrelationhasgoneunchallenged.However,tomyknowledge,notheoryrelatingprivacyoflandtothefurtradehasyetbeenarticulated.ThefactualmaterialuncoveredbySpeckandLeacockfitsthethesisofthispaperwell,andindoingso,itrevealsclearlytheroleplayedbypropertyrightadjustmentsintakingaccountofwhateconomistshaveoftencitedasanexampleofanexternality-theoverhuntingofgame.

Becauseofthelackofcontroloverhuntingbyothers,itisinnoperson’sinteresttoinvestinincreasingormaintainingthestockofgame.Overlyintensivehuntingtakesplace.Thusasuccessfulhuntisviewedasimposingexternalcostsonsubsequenthunters-coststhatarenottakenintoaccountfullyinthedeterminationoftheextentofhuntingandofanimalhusbandry.

Beforethefurtradebecameestablished,huntingwascarriedonprimarilyforpurposesoffoodandtherelativelyfewfursthatwererequiredforthehunter’sfamily.Theexternalitywasclearlypresent.Huntingcouldbepracticedfreelyandwascarriedonwithoutassessingitsimpactonotherhunters.Buttheseexternaleffectswereofsuch

3.EleanorLeacock,AmericanAnthropologist(AmericanAnthropologicalAsso.),Vol.56,No.5,Part2,MemoirNo.78.

4.Cf.,FrankG.Speck,“TheBasisofAmericanIndianOwnershipofLand,〞OldPennWeeklyRev.(Univ.ofPennsylvania),Jan.16,1915,pp.491-95.

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smallsignificancethatitdidnotpayforanyonetotakethemintoaccount.Theredidnotexistanythingresemblingprivateownershipinland.AndintheJesuitRelations,particularlyLeJeune’srecordofthewinterhespentwiththeMontagnesin1633-34andinthebriefaccountgivenbyFatherDruilletesin1647-48,Leacockfindsnoevidenceofprivatelandholdings.Bothaccountsindicateasocioeconomicorganizationinwhichprivaterightstolandarenotwelldeveloped.

Wemaysafelysurmisethattheadventofthefurtradehadtwoimmediateconsequences.First,thevalueoffurstotheIndianswasincreasedconsiderably.Second,andasaresult,thescaleofhuntingactivityrosesharply.Bothconsequencesmusthaveincreasedconsiderablytheimportanceoftheexternalitiesassociatedwithfreehunting.Thepropertyrightsystembegantochange,anditchangedspecificallyinthedirectionrequiredtotakeaccountoftheeconomiceffectsmadeimportantbythefurtrade.ThegeographicalordistributionalevidencecollectedbyLeacockindicatesanunmistakablecorrelationbetweenearlycentersoffurtradeandtheoldestandmostcompletedevelopmentoftheprivatehuntingterritory.

Bythebeginningoftheeighteenthcentury,webegintohaveclearevidencethatterritorialhuntingandtrappingarrangementsbyindividualfamiliesweredevelopingintheareaaroundQuebec…Theearliestreferencestosucharrangementsinthisregionindicatesapurelytemporaryallotmentofhuntingterritories.They[AlgonkiansandIroquois]dividethemselvesintoseveralbandsinordertohuntmoreefficiently.Itwastheircustomtoappropriatepiecesoflandabouttwoleaguessquareforeachgrouptohuntexclusively.Ownershipofbeaverhouses,however,hadalreadybecomeestablished,andwhendiscovered,theyweremarked.AstarvingIndiancouldkillandeatanother’sbeaverifheleftthefurandthetail.5

Thenextsteptowardthehuntingterritorywasprobablyaseasonalallotmentsystem.Ananonymousaccountwrittenin1723statesthatthe“principleoftheIndiansistomarkoffthehuntinggroundselectedbythembyblazingthetreeswiththeircrestssothattheymayneverencroachoneachother…Bythemiddleofthecenturytheseallottedterritorieswererelativelystabilized.〞6

Theprinciplethatassociatespropertyrightchangeswiththeemergenceofnewandreevaluationofoldharmfulandbeneficialeffectssuggestsinthisinstancethatthefurtrademadeiteconomictoencouragethehusbandingoffur-bearinganimals.Husbandingrequirestheabilitytopreventpoachingandthis,inturn,suggeststhatsocioeconomicchangesinpropertyinhuntinglandwilltakeplace.Thechainofreasoningisconsistentwiththeevidencecitedabove.IsitinconsistentwiththeabsenceofsimilarrightsinpropertyamongthesouthwesternIndians?

Twofactorssuggestthatthethesisisconsistentwiththeabsenceof

5.EleanorLeacock,op.cit.,p.15.

6.EleanorLeacock,op.cii.,p.15.

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similarrightsamongtheIndiansofthesouthwesternplains.Thefirstoftheseisthattherewerenoplainsanimalsofcommercialimportancecomparabletothefur-bearinganimalsoftheforest,atleastnotuntilcattlearrivedwithEuropeans.Thesecondfactoristhatanimalsoftheplainsareprimarilygrazingspecieswhosehabitistowanderoverwidetractsofland.Thevalueofestablishingboundariestoprivatehuntingterritoriesisthusreducedbytherelativelyhighcostofpreventingtheanimalsfrommovingtoadjacentparcels.HenceboththevalueandcostofestablishingprivatehuntinglandsintheSouthwestaresuchthatwewouldexpectlittledevelopmentalongtheselines.Theexternalitywasjustnotworthtakingintoaccount.

ThelandsoftheLabradorPeninsulashelterforestanimalswhosehabitsareconsiderablydifferentfromthoseoftheplains.Forestanimalsconfinetheirterritoriestorelativelysmallareas,sothatthecostofinternalizingtheeffectsofhusbandingtheseanimalsisconsiderablyreduced.Thisreducedcost,togetherwiththehighercommercialvalueoffur-bearingforestanimals,madeitproductivetoestablishprivatehuntinglands.FrankG.SpeckfindsthatfamilyproprietorshipamongtheIndiansofthePeninsulaincludedretaliationagainsttrespass.Animalresourceswerehusbanded.Sometimesconservationpracticeswerecarriedonextensively.Familyhuntingterritoriesweredividedintoquarters.Eachyearthefamilyhuntedinadifferentquarterinrotation,leavingatractinthecenterasasortofbank,nottobehuntedoverunlessforcedtodosobyashortageintheregulartract.

ToconcludeourexcursionintothephenomenonofprivaterightsinlandamongtheAmericanIndians,wenoteonefurtherpieceofcorroboratingevidence.AmongtheIndiansoftheNorthwest,highlydevelopedprivatefamilyrightstohuntinglandshadalsoemerged-rightswhichwentsofarastoincludeinheritance.HereagainwefindthatforestanimalspredominateandthattheWestCoastwasfrequentlyvisitedbysailingschoonerswhoseprimarypurposewastradinginfurs.7

7.Thethesisisconsistentwiththedevelopmentofothertypesofprivaterights.Amongwanderingprimitivepeoplesthecostofpolicingpropertyisrelativelylowforhighlyportableobjects.Theowningfamilycanprotectsuchobjectswhilecarryingonitsdailyactivities.Iftheseobjectsarealsoveryuseful,propertyrightsshouldappearfrequently,soastointernalizethebenefitsandcostsoftheiruse.Itisgenerallytrueamongmostprimitivecommunitiesthatweaponsandhouseholdutensils,suchaspottery,areregardedasprivateproperty.Bothtypesofarticlesareportableandbothrequireaninvestmentoftimetoproduce.Amongagriculturally-orientedpeoples,becauseoftherelativefixityoftheirlocation,portabilityhasasmallerroletoplayinthedeterminationofproperty.Thedistinctionismostclearlyseenbycomparingpropertyinlandamongthemostprimitiveofthesesocieties,wherecroprotationandsimplefertilizationtechniquesareunknown,orwherelandfertilityisextremelypoor,withpropertyinlandamongprimitivepeopleswhoaremoreknowledgeableinthesemattersorwhopossessverysuperiorland.Onceacropisgrownbythemoreprimitiveagriculturalsocieties,itisnecessaryforthemtoabandonthelandforseveralyearstorestoreproductivity.Propertyrightsinlandamongsuchpeoplewouldrequirepolicingcostforseveralyearsduringwhichnosizableoutputisobtained.Sincetoprovidefor[sustenancethesepeoplemustmovetonewland,apropertyrighttobeofvaluetothemmustbeassociatedwithaportableobject.Amongthesepeopleitiscommontofindpropertyrightstothecrops,which,afterharvest,areportable,butnottotheland.Themoreadvancedagriculturallybasedprimitivesocietiesareabletoremainwithparticularlandforlongerperiods,andherewegenerallyobservepropertyrightstothelandaswellastothecrops.]

HHC:[bracketed]displayedonpage354oforiginal]

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TheCoalescenceandOwnershipofPropertyRights

Ihavearguedthatpropertyrightsarisewhenitbecomeseconomicforthoseaffectedbyexternalitiestointernalizebenefitsandcosts.ButIhavenotyetexaminedtheforceswhichwillgoverntheparticularformofrightownership.Severalidealizedformsofownershipmustbedistinguishedattheoutset.Thesearecommunalownership,privateownership,andstateownership.

Bycommunalownership,Ishallmeanarightwhichcanbeexercisedbyallmembersofthecommunity.Frequentlytherightstotillandtohuntthelandhavebeencommunallyowned.Therighttowalkacitysidewalkiscommunallyowned.Communalownershipmeansthatthecommunitydeniestothestateortoindividualcitizenstherighttointerferewithanyperson’sexerciseofcommunally-ownedrights.Privateownershipimpliesthatthecommunityrecognizestherightoftheownertoexcludeothersfromexercisingtheowner’sprivaterights.Stateownershipimpliesthatthestatemayexcludeanyonefromtheuseofarightaslongasthestatefollowsacceptedpoliticalproceduresfordeterminingwhomaynotusestate-ownedproperty.Ishallnotexamineindetailthealternativeofstateownership.Theobjectoftheanalysiswhichfollowsistodiscernsomebroadprinciplesgoverningthedevelopmentofpropertyrightsincommunitiesorientedtoprivateproperty.

Itwillbebesttobeginbyconsideringaparticularlyusefulexamplethatfocusesourattentionontheproblemoflandownership.Supposethatlandiscommunallyowned.Everypersonhastherighttohunt,till,orminetheland.Thisformofownershipfailstoconcentratethecostassociatedwithanyperson’sexerciseofhiscommunalrightonthatperson.Ifapersonseekstomaximizethevalueofhiscommunalrights,hewilltendtooverhuntandoverworkthelandbecausesomeofthecostsofhisdoingsoarebornebyothers.Thestockofgameandtherichnessofthesoilwillbediminishedtooquickly.Itisconceivablethatthosewhoowntheserights,i.e.,everymemberofthecommunity,canagreetocurtailtherateatwhichtheyworkthelandsifnegotiatingandpolicingcostsarezero.Eachcanagreetoabridgehisrights.Itisobviousthatthecostsofreachingsuchanagreementwillnotbezero.Whatisnotobviousisjusthowlargethesecostsmaybe.

Negotiatingcostswillbelargebecauseitisdifficultformanyper-

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sonstoreachamutuallysatisfactoryagreement,especiallywheneachhold-outhastherighttoworkthelandasfastashepleases.But,evenifanagreementamongallcanbereached,wemustyettakeaccountofthecostsofpolicingtheagreement,andthesemaybelarge,also.Aftersuchanagreementisreached,noonewillprivatelyowntherighttoworktheland;allcanworkthelandbutatanagreeduponshorterworkweek.Negotiatingcostsareincreasedevenfurtherbecauseitisnotpossibleunderthissystemtobringthefullexpectedbenefitsandexpectedcostsoffuturegenerationstobearoncurrentusers.

Ifasinglepersonownsland,hewillattempttomaximizeitspresentvaluebytakingintoaccountalternativefuturetimestreamsofbenefitsandcostsandselectingthatonewhichhebelieveswillmaximizethepresentvalueofhisprivately-ownedlandrights.Weallknowthatthismeansthathewillattempttotakeintoaccountthesupplyanddemandconditionsthathethinkswillexistafterhisdeath.Itisverydifficulttoseehowtheexistingcommunalownerscanreachanagreementthattakesaccountofthesecosts.

Ineffect,anownerofaprivaterighttouselandactsasabrokerwhosewealthdependsonhowwellhetakesintoaccountthecompetingclaimsofthepresentandthefuture.Butwithcommunalrightsthereisnobroker,andtheclaimsofthepresentgenerationwillbegivenanuneconomicallylargeweightindeterminingtheintensitywithwhichthelandisworked.Futuregenerationsmightdesiretopaypresentgenerationsenoughtochangethepresentintensityoflandusage.Buttheyhavenolivingagenttoplacetheirclaimsonthemarket.Underacommunalpropertysystem,shouldalivingpersonpayotherstoreducetherateatwhichtheyworktheland,hewouldnotgainanythingofvalueforhisefforts.Communalpropertymeansthatfuturegenerationsmustspeakforthemselves.Noonehasyetestimatedthecostsofcarryingonsuchaconversation.

Thelandownershipexampleconfrontsusimmediatelywithagreatdisadvantageofcommunalproperty.Theeffectsofaperson’sactivitiesonhisneighborsandonsubsequentgenerationswillnotbetakenintoaccountfully.Communalpropertyresultsingreatexternalities.Thefullcostsoftheactivitiesofanownerofacommunalpropertyrightarenotbornedirectlybyhim,norcantheybecalledtohisattentioneasilybythewillingnessofotherstopayhimanappropriatesum.Communalpropertyrulesouta“pay-to-use-the-property〞