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Extending Property Rights
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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 wouldn’t expect to receive any
compensation, especially if the company was in another country.
Externalities can arise because
property rights aren’t 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 doesn’t 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 isn’t 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 nation’s borders can be difficult if the link
between the pollution and the problem, e.g., asbestos and various
carcinogenic leading to medical problems.
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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?
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