The not so wild wild west

• The tragedy of the commons occurs

  1. when there are no limits on access to a resource
  2. results in the resource being overused
• frontier

  • margin between a resource having no value and where they have positive value
  • frontier occurs when the value of the land turns positive
• The path of land rents over time

  • land would have negative value to non indians
  • as pop grew, and people pushed out west
  • bringing civilization and economy closer to land
  • land would become positive,
  • land becomes the frontier to non indians
• Rent

  the value of a unique asset that can't be reproduced
• buffalo rent example

  • certain cliffs with hourglass characteristics were more valuable than others
  • earn more rent
• difference between rent & profit

  • rents cant be competed away
• Mcdonald's example of rent and profit

  • rent
  • Production techniques
  • fast, consistent service
  • all were unique and new
• The extent that McDonald's owner's ideas could be closely replicated his earnings were profits, that could be easily competed away
• Michael Jordan

  • athletes tried to replicate MJ'a skill and compete away his profit, but to the extent that his athletic ability was unique, it could not be replicated, and hence commanded rent
• Rent cannot be competed away

  • because they result from unique asset of characteristics to which property rights can be established
• Rent can be dissipated

  • dissipated
  • property rights are poorly defined and enforced
  • allows unique assets to be overused or fought over
• examples of dissipated rent

  • land available to all will be overgrazed in a tragedy of the commons
  • the tragedy is that the rents are dissipated by overgrazing
• Unfettered access will dissipate rent of

  • valuble Fish (overfishing)
  • valuable oil pools or groundwater (over-pumping)
  • freeway (congestion)
• If the rent of unique resources are not dissipated through overuse, they can be dissipated through

  • race to control or possess the resource
• The race to homestead land

  • rent dissipation
  • race to control or possess the resources
  • induced people to move beyond the frontier and go to the land before the land commanded a positive rent
  • suffering endured was a cost that dissipated part or all of the valuable land rent
• racing to beat others to catch fish, to pump oil or ground water, are examples of how rent can be dissipated
• The story of the western frontier is a story of rent and how they were captured and dissipated.
• Wild West Frontier vs. not so wild west frontier

  • rent dissipated through fighting and racing
  • rent captured and nurtured
  • individuals and groups peacefully
  • defined and enforced property rights
  • engaged in market transactions(those rights were exchanged)
  • example: mining claims, water rights, grazing rights to open range
• Whether people fight over valuable resources or engage in cooperation and trade depends on

  how well property rights defined and enforced
• property rights determine


  • who has access to a valuable goods and services
  • who gets the benefits from them
  • who pays the cost of utilizing them
• property rights in other terms

  the rules that govern who gets what and who pays for what
• transaction cost

  the cost of specifying, monitoring, and enforcing and trading property rights
• transaction costs are the most important factor in

  determining whether people can define and enforce property rights without dissipating the rents they are trying to capture from those rights
• higher transaction cost

  • more costly for people to cooperate
  • less likely they will gain from trade
  • more likely that conflict will ensue
• Institutional entrepreneurs

  • the people who recognize potential gains from establishing property rights and act to establish rules that will allow the gain to be realized
• paths of institutinal entreprenueurs

  1. reorganizing existing property rights
  2. defining new property rights where they do not exist
  3. redistributing existing property rights
• reallocation and definition of rights create wealth for society
• The redistribution of rights reduces wealth for society
• institutions

  • long-standing, persistent, sustainable organizations or practices
  • serves specific functions for society
  • relying on rules and norms to carry out these functions
• Institutions are formed...

  • and maintained by people
  • exist for the sake of people
• Institutions themselves are distinct from the people who belong to them

  • because institutions are old
  • outlast the people that form them, and serve them
• Institutions exist beyond the confines of an object, building, or location associated with them

  Institution
• structure of an institution is made up of

  ideas, social mechanisms, rules/norms

  rather than concrete or lumber
• examples of institutions

  • family
  • education
  • banking
  • free market & private property
  • the media
  • religion
  • law
• Reorganizing of property rights

  • Recognizing higher valued use for resource and profits from acting on his recognition
• Reorganizing of property rights example

  Tex thinks the land would be more valuable for wheat production

  • tex can profit from buying the land and putting it to higher-valued use
  • requires: property rights of land can be defined and enforced at a low enough cost for the exchange to remain profitable
  • Following path above: tex (institutional entre) takes the already existing set of property rights and rearranges them through market process - the process manifests itself in contracts that transfer control of property rights from one individual to another
• Reorganizing property rights : formation of a new firm

  • Hoss thinks taking cattle from texas to Montana would be more profitable
  • hoss would buy cattle from tex, and drive them up to Montana, and capture the profit
  • alternatively, if hoss and Tex join together and create their own firm this would be
  • tex: superior knowledge about cattle in texas, and provides the cattle
  • hoss: knows the trails, and drives them to Montana and markets them in mining camps
  • Firm allows owners to take advantage of
  • scale economies, specialization, and special knowledge they may share
• Reorganizing property rights involves specifying what contributions each will make to the firm and what shares of profit each partner will get.
• Reorganizing property rights: Organizational cost

  Monitoring is necessary to ensure that each party in a contract is living up to the terms of the agreement.
• Reorganizing property rights: Organizational cost

  Incomplete contracts allow opportunistic behavior by allowing one party in the contract to get part of the profits at the expense of the other party.