Optimal Completeness of Property Rights on Renewable Resources in Presence of Market Power
There
are many instances where property rights are imperfectly defined, incomplete,
or imperfectly enforced. The purpose of this normative paper is to address the
following question: are there conditions under which partial property rights
are economically efficient in a renewable resource economy? To address this
question, we treat the level of completeness of property rights as a continuous
variable in a renewable resource economy. By design, property rights restrict
access to the resource, so that they may allow a limited number of firms to
exercise market power. We show that there exists a level of property rights
completeness that leads to first-best resource exploitation; this level is different
from either absent or complete property rights. Complete rights are neither
necessary nor sufficient for efficiency in presence of market power. We derive
an analytic expression for the optimal level of property rights completeness and
discuss its policy relevance and information requirements. The optimal level
depends on i) the number of firms; ii) the elasticity of input productivity and
iii) the price elasticity of market demand. We also find that a greater difference
between the respective values of input and output requires stronger property
rights. In fact, high profits both imply a severe potential commons problem and
may be the expression of market power; strong property rights limit the commons
problem; their incompleteness offsets market power. Biology also impacts the optimal
quality of property rights: when the stock of resource is more sensitive to
harvesting efforts, optimal property rights need to be more complete.
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