The final broad class of social institutions we consider is concerned with the allocation of resources in a society via property rights. Property rights give the holder of the right the ability to use a resource, the ability to exclude others from using it, and usually the right to sell or transfer the resource to another person. Property can take many forms, ranging from physical property such as a plot of land or a can of Diet Coke, to intellectual property such as a song or a manufacturing process. In this chapter we examine how the existence and form of property rights, or the lack of property rights, can affect social outcomes for each of these types of property. The central message of this chapter is that the property rights a society chooses to establish will affect the allocations that occur, and some property rights are more likely than others to result in socially optimal allocations.

Externalities and the Coase Theorem

In Chapter 17 we argued that the allocation of goods that arises in a market equilibrium (for an economy without network effects) is socially optimal. In a market equilibrium, the goods that are produced are assigned to the consumers who value them the most, and any unit of a good that is produced costs society less to produce than it is worth to the consumer who receives the good. This results in maximum total social surplus.