Econ: What are Property Rights and the Role of Incentives?

What are Property Rights and the Role of Incentives? Property rights are a fundamental tenet of capitalism. It confers the power of decision making by private parties within a legal system upon private property, both tangible as well as intellectual. The role of incentives in economics is to create attractive rewards and benefits to persuade others to follow a certain path in the use of capital or to dissuade others with penalties so they will avoid a certain direction in their capital applications.

FinanceEcon
LanguageEnglish Language

Transcript

00:21

another property Well that's legal shade throwing from one neighbour

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to another The shade is an example of what we

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call an externality to side effect from one party's activity

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that affects another If the shade is considered a bonus

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well nobody likes skin cancer you know Then it's a

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freebie something they didn't pay for but are glad to

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have Anyway I eat It's a positive externality If the

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shade is considered a problem by the neighbour like go

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well if they want to get their tan on well

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then it would be considered a negative externality Well we

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usually focus on negative externalities since people don't like them

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A common example of a negative extra analogy in economics

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runs when factories pollute nearby residential areas whether by making

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the air quality horrible or leaking chemicals into ground water

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which results in early deaths and dork while jaw dropping

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medical bills and all kinds of other sadness Well positive

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externalities air important too since they can result in moochers

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mooching hard core If you've ever put more than your

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fair share of work into a quote team unquote project

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you know the drill You work hard only to see

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other people than taking credit for work they didn't do

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We call this the free rider problem where one group

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gets benefits without paying any expenses or costs for those

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benefits which fall on someone else You know we've all

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been there on one side or another negative and positive

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externalities both cause what we call dead weight loss which

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measures how inefficient things are for society We prefer no

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dead weight loss which would mean that everyone's paying for

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what they're getting People who have to deal with negative

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externalities would get paid for those externalities and people with

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positive externalities would pay for the freebies they're getting When

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it's clear what belongs to whom It's easier to work

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out externality problems like the problem of the Chocolate River

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use in Willy Wonka's Chocolate Factory Let's break it down

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One group of people Loompas Chako Loompas make chocolate which

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requires the Chocolate River Another group of Oompa Loompas Gobstopper

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Loompas used the chocolate river for Transportacion Will the Chako

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Lupas don't like that The Gobstopper Loompas are using the

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river since they're polluting it that pollution is a negative

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externality for the Chako Loompas Well the Chaka Loompas feel

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like they were minding their own business Just making chocolate

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you know that you eat And then the Gobstopper Loompas

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just started polluting the river Well they have to take

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extra time now in money to clean the pollution out

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of the Chocolate River which they don't think is fair

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Another reason that Chaka Loompas are mad is that the

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Gobstopper Loompas are just using the river as transportation for

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free Where the Chaka Loompas CIA Free Rider Problem The

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Gobstopper Loompas CIA positive externality As long as nobody says

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anything Polluters air incentivized to keep pollutant without paying for

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it and moochers r incentivized to keep on mooching At

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the Opal Opal lunch all things got tense before violence

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broke out One Loompa Loompa who works with the squirrels

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said You guys should just property rights so Mr Wonka

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doesn't have to get involved again And that's just what

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they did the belugas All agreed that the Chako Loompas

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should have the property rights to the river and that

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the Gobstopper Loompas should hey to use and well to

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pollute the river The fees paid went towards paying for

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the pollution filtering of the chocolate River I eat that

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negative externalities The fees accounted for them using the river

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as a positive externality too Since the Gobstopper Loompas had

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to actually pay to use the river Now they were

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more conservative with how they transported their gobstoppers resulting in

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less pollution in the river for the Chaka Loompas toe

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filter out as well as well the money to pay

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for it resulting in an efficient market outcome This is

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an example of how private property rights can solve externality

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problems without public solutions and all kinds of congressional mandates

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needed for public solutions are government interventions like the popular

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cap and trade thing For example the idea that you

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can internalize an externality with property rights and no need

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for government intervention is thanks to Nobel Prize winner and

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very smart human being Ronald Coast the coast there um

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under the coast here um it doesn't matter to whom

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property rights are assigned as long as they're assigned to

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someone If they are then poof gnome or externalities Well

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unfortunately the Coast serum of setting property rights to get

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rid of things like negative externalities doesn't always work For

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instance it's easy to assign property rights to a river

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But what about to the air Well pollution start small

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than spreads all the way across the globe No one

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owns all the air so yeah it's a problem This

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is what we call the assignment problem when it's hard

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to ask Sign property rights to a thing There's also

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something called the holdout problem Well what if some of

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the Temple Loompas were stubborn and couldn't reach an agreement

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on what to do when there's shared ownership There's the

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potential for someone in the group to hold out because

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they disagree with everyone else Congress Sorry just coughing Excuse

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me There's something else that happens sometimes when you try

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to use property rights to fix things transaction costs and

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negotiation issues right Well the Coast theory assumes that negotiating

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doesn't cost anything Big corporations might have the time and

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money to go through court to settle disputes about the

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pollution they're doing and not paying for But families don't

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Which is why class action lawsuits are ah thing Transaction

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costs are rial and can be a serious barrier when

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there are problems You know like the assignment problem the

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holdout problem and too high negotiation costs Well we turn

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to public solutions than over private ones to solve those

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externality issues If only things were as simple in the

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real world as they are in Willy Wonka's chocolate factory

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life would be better provided you keep away from the 00:06:06.407 --> [endTime] squirrels Of course Yeah they'Ll get you