Wednesday, October 26, 2016

Optimal Completeness of Property Rights on Renewable Resources in Presence of Market Power

Alexandre Croutzet and Pierre Lasserre discuss Optimal Completeness of Property Rights on Renewable Resources in Presence of Market Power.

ABSTRACT: 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 rel! evance 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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