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Extending Property Rights


If a lorry delivering chemical crashed into your home you would expect to receive compensation.  However if the chemical company were to pollute the atmosphere and killed the trees in your garden you wouldnít expect to receive any compensation, especially if the company was in another country.


Externalities can arise because property rights arenít fully allocated, for example nobody owns the atmosphere or oceans.  An alternative to regulation is the extension of property rights.  It gives water companies the right to charge companies who pollute the rivers and seas.  Extending property rights is a method of internalising the externality.


Advantages of extending property rights are

  • The government doesnít have to assess the value of property as it is assumed the owners of the property will have a better knowledge of its value.
  • There will be a direct transfer of resources from the polluters those who suffer.  With regulation it isnít those who suffer that receive the compensation.


There are however a number of disadvantages:

  • The government may not have the ability to extend property rights, e.g., how would the British government prevent Brazilian firms from destroying the rainforests which leads to global warming.
  • Extending property rights within a nationís borders can be difficult if the link between the pollution and the problem, e.g., asbestos and various carcinogenic leading to medical problems.
  • It is often difficult for the owner of the property to assess its value, e.g., if one home owner may place a different value on his trees than another, which value of compensation should be paid if the trees are destroyed?



E-mail Steve Margetts