What are better-defined property rights and what incentive do they provide to account for external costs?

Property rights refer to the legal rights of owners of resources or goods, and how those rights are defined and enforced. These rights include the right to: own, use, sell, rent, bequeath, and transfer property to others. External costs, on the other hand, are costs that are imposed on others as a result of an individual's or firm's actions, but are not directly accounted for in market transactions. An example of an external cost is air pollution caused by a factory's emissions.

The Coase Theorem, named after economist Ronald Coase, states that if property rights are well-defined and transaction costs are low, then private parties can negotiate and reach mutually beneficial agreements to account for external costs. In other words, when property rights are clear and upheld, individuals and firms will have an incentive to negotiate with each other to find solutions to external costs, as they will be directly responsible for them.

When property rights are well-defined and enforced, it becomes easier for individuals and firms to be held accountable for the external costs their actions impose on others. This creates an incentive for them to take these costs into account when making decisions, as they may be held financially liable for the consequences of their actions. Moreover, better-defined property rights allow for more efficient use of resources by ensuring that the true costs of production are accounted for in market transactions. When property rights are unclear or insufficiently enforced, external costs are not accounted for, leading to resources being overused or misallocated, and overall economic inefficiency.

Improved property rights can be seen in various environmental policies. One example is the establishment of tradable carbon emission permits, where companies are allocated a specific amount of allowed emissions and can buy or sell these permits among each other. The rights to emit a set amount of pollution are clearly defined, incentivizing companies to find innovative ways to reduce their emissions and trade their unused permits for financial gains. Another example is the enforcement of fishing quotas, which protect fish populations from overfishing and ultimately ensure the long-term sustainability of fisheries. By assigning clear rights to fishing companies for the harvesting of a specific quota, there is an incentive to optimize harvesting practices and promote the long-term health of the fish population. In conclusion, better-defined property rights provide incentives for individuals and firms to account for external costs in their decision-making process, ultimately leading to a more efficient allocation of resources and reduction in external costs.