TowardsaTheoryofPropertyRightsHaroldDemsetzTheAmericanEconomicReviewVolume57,Issue2May,1967,347-359.IndexIntroductionTheConceptandRoleofPropertyRightsTheEmergenceofPropertyRightsTheCoalescenceandOwnershipofPropertyRightsIntroductionWhenatransactionisconcludedinthemarketplace,twobundlesofpropertyrightsareexchanged.Abundleofrightsoftenattachestoaphysicalcommodityorservice,butitisthevalueoftherightsthatdeterminesthevalueofwhatisexchanged.Questionsaddressedtotheemergenceandmixofthecomponentsofthebundleofrightsarepriortothosecommonlyaskedbyeconomists.Economistsusuallytakethebundleofpropertyrightsasadatumandaskforanexplanationoftheforcesdeterminingthepriceandthenumberofunitsofagoodtowhichtheserightsattach.Inthispaper,Iseektofashionsomeoftheelementsofaneconomictheoryofpropertyrights.Thepaperisorganizedintothreeparts.Thefirstpartdiscussesbrieflytheconceptandroleofpropertyrightsinsocialsystems.Thesecondpartofferssomeguidanceforinvestigatingtheemergenceofpropertyrights.Thethirdpartsetsforthsomeprinciplesrelevanttothecoalescingofpropertyrightsintoparticularbundlesandtothedeterminationoftheownershipstructurethatwillbeassociatedwiththesebundles.TheConceptandRoleofPropertyRightsIntheworldofRobinsonCrusoepropertyrightsplaynorole.Propertyrightsareaninstrumentofsocietyandderivetheirsignificancefromthefactthattheyhelpamanformthoseexpectationswhichhecanreasonablyholdinhisdealingswithothers.Theseexpectationsfindexpressioninthelaws,customs,andmoresofasociety.Anownerofpropertyrightspossessestheconsentoffellowmentoallowhimtoactinparticularways.Anownerexpectsthecommunitytopreventothersfrominterferingwithhisactions,providedthattheseactionsarenotprohibitedinthespecificationsofhisrights.Itisimportanttonotethatpropertyrightsconveytherighttobenefitorharmoneselforothers.Harmingacompetitorbyproducingsuperiorproductsmaybepermitted,whileshootinghimmaynot.Amanmaybepermittedtobenefithimselfbyshootinganintruderbutbeprohibitedfromsellingbelowapricefloor.Itisclear,then,thatpropertyrightsspecifyhowpersonsmaybebenefitedandharmed,and,therefore,whomustpaywhomtomodifytheactionstakenbypersons.Therecognitionofthisleadseasilytothecloserelationshipbetweenpropertyrightsandexternalities.347Externalityisanambiguousconcept.Forthepurposesofthispaper,theconceptincludesexternalcosts,externalbenefits,andpecuniaryaswellasnonpecuniaryexternalities.Noharmfulorbeneficialeffectisexternaltotheworld.Somepersonorpersonsalwayssufferorenjoytheseeffects.Whatconvertsaharmfulorbeneficialeffectintoanexternalityisthatthecostofbringingtheeffecttobearonthedecisionsofoneormoreoftheinteractingpersonsistoohightomakeitworthwhile,andthisiswhatthetermshallmeanhere.“Internalizing”sucheffectsreferstoaprocess,usuallyachangeinpropertyrights,thatenablestheseeffectstobear(ingreaterdegree)onallinteractingpersons.Aprimaryfunctionofpropertyrightsisthatofguidingincentivestoachieveagreaterinternalizationofexternalities.Everycostandbenefitassociatedwithsocialinterdependenciesisapotentialexternality.Oneconditionisnecessarytomakecostsandbenefitsexternalities.Thecostofatransactionintherightsbetweentheparties(internalization)mustexceedthegainsfrominternalization.Ingeneral,transactingcostcanbelargerelativetogainsbecauseof“natural”difficultiesintradingortheycanbelargebecauseoflegalreasons.Inalawfulsocietytheprohibitionofvoluntarynegotiationsmakesthecostoftrans...
