Property Rights' Importance

This is a bad year for great economists. Already, 2013 has seen the deaths of three of the 20th century's most inspiring economists. My colleague — and 1986 Nobel laureate — James Buchanan died in January. UCLA's Armen Alchian died in February. And 1991 Nobel laureate Ronald Coase, of the University of Chicago, died earlier this month.

Coase's most important contribution was to explain in impressive detail how secure and tradable property rights promote beneficial cooperation and outcomes.

Prior to Coase's 1960 paper “The Problem of Social Cost,” the unquestioned belief was that the successful resolution of conflicts over the use of nonphysical resources required the genius of judges or government bureaucrats. For example, if 10 radio stations each want to use the same portion of the electromagnetic spectrum for their broadcasts, the belief was that the Federal Communications Commission has to determine which broadcaster would use that portion of the spectrum most productively.

If the bureaucrats get it right, that part of the spectrum would be used by the radio station that puts it to the best use. But if the bureaucrats get it wrong, then too bad for the public.

Coase said “nonsense.” As long as property rights in each portion of the electromagnetic spectrum can be bought and sold on the market, then the radio stations that can put each part of the spectrum to its best possible use will be the stations that wind up broadcasting over the spectrum.

Suppose the FCC awards a part of the spectrum to a station that insists on broadcasting cricket noises. That station is unlikely to be the one that uses that part of the spectrum most productively from the public's point of view. Another station that has plans to use that part of the spectrum in ways more useful to the public — say, by broadcasting pop music — will offer to purchase the cricket station's property right in the spectrum. And the cricket station will voluntarily sell because the pop-music station will attach a higher value to owning that part of the spectrum than will the cricket station.

Coase showed that as long as property rights are clear and secure, and people can bargain freely with each other, nonphysical resources (such as the electromagnetic spectrum) will eventually be owned by those people and businesses that use these resources most productively from society's perspective.

An upshot of Coase's insight is that command-and-control regulations are almost always harmful, or at least suboptimal. Such regulations dictate in detail how firms should behave and deny them the flexibility to find better ways to achieve the same desired outcomes. If each steel producer, say, is told that it must install pollution scrubbers on its factory's smokestacks, every steel producer is barred from using less costly ways to reduce pollution.

Coase insisted that government should largely limit itself to defining and enforcing property rights. Bargaining in markets — bargaining to buy, to sell and to use such rights as individuals on the spot judge best — will almost always generate better outcomes than will top-down diktats.