Property rights (economics)

Property rights are theoretical socially-enforced constructs in economics for determining how a resource or economic good is used and owned.[1] Resources can be owned by (and hence be the property of) individuals, associations or governments.[2] Property rights can be viewed as an attribute of an economic good. This attribute has four broad components[3] and is often referred to as a bundle of rights:[4]

  1. the right to use the good
  2. the right to earn income from the good
  3. the right to transfer the good to others
  4. the right to enforce property rights

In economics, property is usually considered to be ownership (rights to the proceeds generated by the property) and control over a resource or good. Many economists effectively argue that property rights need to be fixed and need to portray the relationships among other parties in order to be more effective.[5]

Regimes

Property rights to a good must be defined, their use must be monitored, and possession of rights must be enforced.[6]The costs of defining, monitoring, and enforcing property rights are termed transaction costs.[7][8] Depending on the level of transaction costs, various forms of property rights institutions will develop. Each institutional form can be described by the distribution of rights.

The following list is ordered from no property rights defined to all property rights being held by individuals[9]

  • Nobodies property (res nullius) is not 'owned' by anyone. It is non-excludable (no one can exclude anyone else from using it), non-transferable, but may be rival (one person's use of it reduces the quantity available to other users). Open-access property is not managed by anyone, and access to it is not controlled. There is no constraint on anyone using open-access property (excluding people is either impossible or prohibitively costly). Examples of currently open-access property is outer space or ocean fisheries (outside of territorial borders).

Open-access property may exist because ownership has never been established, granted, by laws within a particular country, or because no effective controls are in place, or feasible, i.e., the cost of exclusivity outweighs the benefits. The government can sometimes effectively convert open access property into private, common, or public property through the land grant process, by legislating to define public/private rights previously not granted.

— Kevin Guerin, [10]
  • Public property (also known as state property) is property that is publicly owned, but its access and use are managed and controlled by a government agency or organization granted such authority. An example is a national park or a state-owned enterprise.[10]
  • Common property or collective property is property that is owned by a group of individuals. Access, use, and exclusion are controlled by the joint owners. True commons can break down, but, unlike open-access property, common property owners have greater ability to manage conflicts through shared benefits and enforcement.[10]
  • Private property is both excludable and rival. Private property access, use, exclusion and management are controlled by the private owner or a group of legal owners.

The environment

Implicit or explicit property rights can be created by regulating the environment, either through prescriptive command and control approaches (e.g. limits on input/output/discharge quantities, specified processes/equipment, audits) or by market-based instruments (e.g. taxes, transferable permits or quotas),[10] and more recently through cooperative, self-regulatory, post-regulatory and reflexive law approaches.[11] See the Conservation Property Right

It has been proposed by Ronald Coase that clearly defining and assigning property rights would resolve environmental problems by internalizing externalities and relying on incentives of private owners to conserve resources for the future. At common law nuisance and tort law allows adjacent property holders to seek compensation when individual actions diminish the air and water quality for adjacent landowners. Critics of this view argue that this assumes that it is possible to internalize all environmental benefits, that owners will have perfect information, that scale economies are manageable, transaction costs are bearable, and that legal frameworks operate efficiently.[10]

Literature

In 2013 researchers[12] produced an annotated bibliography on the property rights literature concerned with two principal outcomes: (a) reduction in investors risk and increase in incentives to invest, and (b) improvements in household welfare; the researchers explored the channels through which property rights affect growth and household welfare in developing countries. They found that better protection of property rights can affect several development outcomes, including better management of natural resources.

Despite the overwhelming evidence on the economic relevance of property rights however, only recently economists have begun to study their determinants by looking at the trade-off between the dispersed coercive power in a state of anarchy and the predation by a central authority. To illustrate, incomplete property rights allow agents with valuation lower than that of the original owners of economic value to inefficiently expropriate them distorting in this way their investment and effort exertion decisions. When instead, the state is entrusted the power to protect property, it might directly expropriate private parties if not sufficiently constrained by an efficient political process.[13] The necessity of strong protection of property for efficiency has been however criticized by a vast legal scholarship, originated from the seminal contribution by Guido Calabresi and Douglas Melamed.[14] These authors argue that in the face of transaction costs sufficiently sizeable to prevent consensual trade, legalized private expropriation in the form of, for instance, liability rules can be welfare-increasing. Carmine Guerriero blends these two different strands of literature by linking property rights protection, transaction costs, and preference heterogeneity.[15] To elaborate, when property is fully protected, some agents with valuation higher than that of the original owners will be unable to legally acquire value because of sizable transaction costs. When the protection of property is weak instead, low-valuation potential buyers inefficiently expropriate original owners. Hence, a rise in the heterogeneity of the potential buyers' valuations makes inefficient expropriation by low-valuation potential buyers be more important from a social welfare point of view than inefficient exclusion from trade and so induces stronger property rights. Crucially, this prediction survives even after considering production and investment activities and it is consistent with a novel dataset on the rules on the acquisition of ownership through adverse possession and on the use of government takings to transfer real property from a private party to another private party prevailing in 126 jurisdictions. These data measure “horizontal property rights” and thus the extent of protection of property from “direct and indirect private takings,” which are ubiquitous forms of expropriation that occur daily within the rule of law and are thus different from predation by the state and the elites, which is much less common but has been the focus of the economics literature. To capture preference diversity, the author uses the contemporary genetic diversity, which is a primitive metric of the genealogical distance between populations with a common ancestor and so of the differences in characteristics transmitted across generations, such as preferences.[16] Regression analysis reveals that the protection of the original owners' property rights is the strongest where contemporary genetic diversity is the largest. Evidence from several different identification strategies suggests that this relationship is indeed causal.

Property rights approach to the theory of the firm

The property rights approach to the theory of the firm based on the incomplete contracting paradigm was developed by Sanford Grossman, Oliver Hart, and John Moore.[17][18] These authors argue that in the real world, contracts are incomplete and hence it is impossible to contractually specify what decisions will have to be taken in any conceivable state of the world. There will be renegotiations in the future, so parties have insufficient investment incentives (since they will only get a fraction of the investment's return in future negotiations); i.e., there is a hold-up problem. Hence, property rights matter, because they determine who has control over future decisions if no agreement will be reached. In other words, property rights determine the parties' future bargaining positions (while their bargaining powers, i.e. their fractions of the renegotiation surplus, are independent of the property rights allocation).[19] The property rights approach to the theory of the firm can thus explain pros and cons of integration in the context of private firms. Yet, it has also been applied in various other frameworks such as public good provision and privatization.[20][21] The property rights approach has been extended in many directions. For instance, some authors have studied different bargaining solutions,[22][23] while other authors have studied the role of asymmetric information.[24]

The role of property rights in economic and political development

Classical economists such as Adam Smith and Karl Marx generally recognize the importance of property rights in the process of economic development, and modern mainstream economics agree with such a recognition.[25] A widely-accepted explanation is that well-enforced property rights provide incentives for individuals to participate in economic activities, such as investment, innovation and trade, which lead to a more efficient market.[26] The development of property rights in Europe during the Middle Ages provides an example.[27] During this epoch, full political power came into the hands of hereditary monarchies, which often abused their power to exploit producers, to impose arbitrary taxes, or to refuse to pay their debts. The lack of protection for property rights provided little incentive for landowners and merchants to invest in land, physical or human capital, or technology. After the English Civil War of 1642-1646 and the Glorious Revolution of 1688, shifts of political power away from the Stuart monarchs led to the strengthening of property rights of both land and capital owners. Consequently, rapid economic development took place, setting the stage for Industrial Revolution.

Property rights are also believed to lower transaction costs by providing an efficient resolution for conflicts over scarce resources.[28] Empirically, using historical data of former European colonies, Acemoglu, Johnson and Robinson find substantial evidence that good economic institutions – those that provide secure property rights and equality of opportunity – lead to economic prosperity.[29]

Property rights might be closely related to the evolution of political order, due to their protections of an individual's claims on economic rents. North, Wallis and Weingast argue that property rights originate to facilitate elites' rent-seeking activities. Particularly, the legal and political systems that protect elites' claims on rent revenues form the basis of the so-called "limited access order", in which non-elites are denied access to political power and economic privileges.[30] In a historical study of medieval England, for instance, North and Thomas find that the dramatic development of English land laws in the 13th century resulted from elites' interests in exploiting rent revenues from land ownership after a sudden rise in land price in the 12th century.[31] In contrast, the modern "open access order", which consists of a democratic political system and a free- market economy, usually features widespread, secure and impersonal property rights. Universal property rights, along with impersonal economic and political competition, downplay the role of rent-seeking and instead favor innovations and productive activities in a modern economy.[32]

See also

References

  1. ^ Alchian, Armen A. "Property Rights". New Palgrave Dictionary of Economics, Second Edition (2008). A property right is a socially enforced right to select uses of an economic good.
  2. ^ Alchian, Armen A. (2008). "Property Rights". In David R. Henderson. Concise Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN 978-0-86597-665-8. OCLC 237794267. Archived from the original on 2007-04-09.
  3. ^ "Economics Glossary". Retrieved 2007-01-28.
       • Thrainn Eggertsson (1990). Economic behavior and institutions. Cambridge, UK: Cambridge University Press. ISBN 978-0-521-34891-1.
       • Dean Lueck (2008). "property law, economics and," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  4. ^ Klein, Daniel B. and John Robinson. "Property: A Bundle of Rights? Prologue to the Symposium." Econ Journal Watch 8(3): 193–204, September 2011.[1]
  5. ^ An, Zhiyong (1 November 2013). "Private Property Rights, Investment Patterns, and Asset Structure". Econ Polit. 25 (3): 481–495. doi:10.1111/ecpo.12021.
  6. ^ Mulale, K.; et al. (2013). "Community-Based Natural Resource Management in Southern Africa: An Introduction". AuthorHouse.
  7. ^ Barzel, Yoram (April 1982). "Measurement Costs and the Organization of Markets". Journal of Law and Economics. 25 (1): 27–48. doi:10.1086/467005. ISSN 0022-2186. JSTOR 725223.
  8. ^ Douglas Allen (1991). What are Transaction Costs? (Research in Law and Economics). Jai Pr. ISBN 978-0-7623-1115-6.
  9. ^ Daniel W. Bromley (1991). Environment and Economy: Property Rights and Public Policy. Cambridge, MA: Blackwell Pub. ISBN 978-1-55786-087-3.
  10. ^ a b c d e Guerin, K. (2003). Property Rights and Environmental Policy: A New Zealand Perspective. Wellington, New Zealand: NZ Treasury
  11. ^ See literature on post-regulatory approaches and reflexive law, especially literature from Gunther Teubner. See also the example of the 'conservation property right'
  12. ^ Mike Denison and Robyn Klingler-Vidra, October 2012, Annotated Bibliography for Rapid Review on Property Rights, Economics and Private Sector Professional Evidence and Applied Knowledge Services (EPS PEAKS)https://partnerplatform.org/?tcafmd80
  13. ^ Besley, Timothy, and Maitreesh Ghatak (2010). Handbook of Development Economics. Amsterdam: Elsevier. pp. 4525–4595.
  14. ^ Calabresi, Guido, and Melamed, A. Douglas (1972). "Property Rules, Liability Rules and Inalienability: One View of the Cathedral". Harvard Law Review. 85 (6): 1089–1128. doi:10.2307/1340059. JSTOR 1340059.
  15. ^ Guerriero, Carmine (2016). "Endogenous Property Rights". Journal of Law and Economics. 59 (2): 313–358. doi:10.1086/686985.
  16. ^ Cavalli-Sforza, Luca L., Paolo Menozzi, and Alberto Piazza (1994). The History and Geography of Human Genes. Princeton, NJ: Princeton University Press.
  17. ^ Grossman, Sanford J.; Hart, Oliver D. (1986). "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration". Journal of Political Economy. 94 (4): 691–719. doi:10.1086/261404. hdl:1721.1/63378. ISSN 0022-3808.
  18. ^ Hart, Oliver; Moore, John (1990). "Property Rights and the Nature of the Firm". Journal of Political Economy. 98 (6): 1119–1158. doi:10.1086/261729. ISSN 0022-3808.
  19. ^ Schmitz, Patrick W. (2013). "Bargaining position, bargaining power, and the property rights approach". Economics Letters. 119 (1): 28–31. doi:10.1016/j.econlet.2013.01.011.
  20. ^ Hart, Oliver; Shleifer, Andrei; Vishny, Robert W. (1997). "The Proper Scope of Government: Theory and an Application to Prisons". The Quarterly Journal of Economics. 112 (4): 1127–1161. doi:10.1162/003355300555448. ISSN 0033-5533.
  21. ^ Hoppe, Eva I.; Schmitz, Patrick W. (2010). "Public versus private ownership: Quantity contracts and the allocation of investment tasks". Journal of Public Economics. 94 (3–4): 258–268. doi:10.1016/j.jpubeco.2009.11.009.
  22. ^ Meza, David de; Lockwood, Ben (1998). "Does Asset Ownership Always Motivate Managers? Outside Options and the Property Rights Theory of the Firm". The Quarterly Journal of Economics. 113 (2): 361–386. doi:10.1162/003355398555621. ISSN 0033-5533.
  23. ^ Chiu, Y. Stephen (1998). "Noncooperative Bargaining, Hostages, and Optimal Asset Ownership". The American Economic Review. 88 (4): 882–901. JSTOR 117010.
  24. ^ Schmitz, Patrick W (2006). "Information Gathering, Transaction Costs, and the Property Rights Approach". American Economic Review. 96 (1): 422–434. doi:10.1257/000282806776157722.
  25. ^ Besley, Timothy; Maitreesh, Ghatak (2009). Rodrik, Dani; Rosenzweig, Mark R, eds. "Property Rights and Economic Development". Handbook of Development Economics. V: 4526–28.
  26. ^ Acemoglu, Daron; Johnson, Simon; Robinson, James (2005). "Institutions as a fundamental cause of long-run growth". Handbook of Economic Growth. 1: 397.
  27. ^ Acemoglu, Daron; Johnson, Simon; Robinson, James A. (2005). Chapter 6 Institutions as a Fundamental Cause of Long-Run Growth. Handbook of Economic Growth. Volume 1. pp. 385–472. doi:10.1016/S1574-0684(05)01006-3. ISBN 978-0-444-52041-8.
  28. ^ Alchian, Armen; Demsetz, Harold (1973). "The Property Right Paradigm". The Journal of Economic History. 33 (1): 16–27. doi:10.1017/S0022050700076403.
  29. ^ Acemoglu, Daron; Johnson, Simon; Robinson, James (2005). "Institutions as a fundamental cause of long-run growth". Handbook of Economic Growth. 1. pp. 385–472.
  30. ^ North, Douglass C; Wallis, John J; Weingast, Barry R (2006). "A conceptual framework for interpreting recorded human history". National Bureau of Economic Research. 12795: 32–33.
  31. ^ North, Douglass C; Thomas, Robert P (1971). "The Rise and Fall of the Manorial System: A Theoretical Model". The Journal of Economic History. 31 (4): 777–803. doi:10.1017/S0022050700074623.
  32. ^ North, Douglass C; Wallis, John J; Weingast, Barry R (2009). "Violence and the Rise of Open-Access Orders". Journal of Democracy. 20 (1): 55–68. doi:10.1353/jod.0.0060.
Bundle of rights

The bundle of rights is a metaphor to explain the complexities of property ownership. Law school professors of introductory property law courses frequently use this conceptualization to describe "full" property ownership as a partition of various entitlements of different stakeholders.The bundle of rights is commonly taught in US first-year law school property classes to explain how a property can simultaneously be "owned" by multiple parties. The term, "bundle of rights," likely came into use during the late 19th century and continued to gain ground thereafter. Prior to that, the idea of property entailed more the owner's dominion over a thing, placing restrictions on others from interfering with the owner's property. "Bundle of rights," however, implies rules specifying, proscribing, or authorizing actions on the part of the owner.Ownership of land is a much more complex proposition than simply acquiring all the rights to it. It is useful to imagine a bundle of rights that can be separated and reassembled. A "bundle of sticks" - in which each stick represents an individual right – is a common analogy made for the bundle of rights. Any property owner possesses a set of "sticks" related directly to the land.For example, perfection of a mechanic's lien takes some, but not all, rights out of the bundle held by the owner. Extinguishing that lien returns those rights or "sticks" to the bundle held by the owner. In the United States (and under common law) the fullest possible title to real estate is called "fee simple absolute." Even the US federal government's ownership of land is restricted in some ways by state property law.

Common ownership

Common ownership refers to holding the assets of an organization, enterprise or community indivisibly rather than in the names of the individual members or groups of members as common property.

Forms of common ownership exist in every economic system. Common ownership of the means of production is a central goal of communist political movements as it is seen as a necessary democratic mechanism for the creation and continued function of a communist society. Advocates make a distinction between collective ownership and common property as the former refers to property owned jointly by agreement of a set of colleagues, such as producer cooperatives, whereas the latter refers to assets that are completely open for access, such as a public park freely available to everyone.

Environmental economics

Environmental economics is a sub-field of economics that is concerned with environmental issues. It has become a widely studied topic due to growing concerns in regards to the environment in the twentyfirst century. Quoting from the National Bureau of Economic Research Environmental Economics program:

... Environmental Economics ... undertakes theoretical or empirical studies of the economic effects of national or local environmental policies around the world ... . Particular issues include the costs and benefits of alternative environmental policies to deal with air pollution, water quality, toxic substances, solid waste, and global warming.

Environmental economics is distinguished from ecological economics in that ecological economics emphasizes the economy as a subsystem of the ecosystem with its focus upon preserving natural capital. One survey of German economists found that ecological and environmental economics are different schools of economic thought, with ecological economists emphasizing "strong" sustainability and rejecting the proposition that natural capital can be substituted by human-made capital.

Free-market environmentalism

Free-market environmentalism argues that the free market, property rights, and tort law provide the best means of preserving the environment, internalizing pollution costs, and conserving resources.

Free-market environmentalists therefore argue that the best way to protect the environment is to clarify and protect property rights. This allows parties to negotiate improvements in environmental quality. It also allows them to use torts to stop environmental harm. If affected parties can compel polluters to compensate them they will reduce or eliminate the externality. Market proponents advocate changes to the legal system that empower affected parties to obtain such compensation. They further claim that governments have limited affected parties' ability to do so by complicating the tort system to benefit producers over others.

Land (economics)

In economics, land comprises all naturally occurring resources as well as geographic land. Examples include particular geographical locations, mineral deposits, forests, fish stocks, atmospheric quality, geostationary orbits, and portions of the electromagnetic spectrum. Supply of these resources is fixed.

Land value tax

A land/location value tax (LVT), also called a site valuation tax, split rate tax, or site-value rating, is an ad valorem levy on the unimproved value of land. Unlike property taxes, it disregards the value of buildings, personal property and other improvements to real estate. A land value tax is generally favored by economists as (unlike other taxes) it does not cause economic inefficiency, and it tends to reduce inequality.Land value tax has been referred to as "the perfect tax" and the economic efficiency of a land value tax has been known since the eighteenth century. Many economists since Adam Smith and David Ricardo have advocated this tax, but it is most famously associated with Henry George, who argued that because the supply of land is fixed and its location value is created by communities and public works, the economic rent of land is the most logical source of public revenue.A land value tax is a progressive tax, in that the tax burden falls on titleholders in proportion to the value of locations, the ownership of which is highly correlated with overall wealth and income. Land value taxation is currently implemented throughout Denmark, Estonia, Lithuania, Russia,, Singapore, and Taiwan; it has also been applied to smaller extents in subregions of Australia, Mexico (Mexicali), and the United States (e.g., Pennsylvania).

Law and economics

Law and economics or economic analysis of law is the application of economic theory (specifically microeconomic theory) to the analysis of law that began mostly with scholars from the Chicago school of economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated.

Private property

Private property is a legal designation for the ownership of property by non-governmental legal entities. Private property is distinguishable from public property, which is owned by a state entity; and from collective (or cooperative) property, which is owned by a group of non-governmental entities. Private property can be either personal property (consumption goods) or capital goods. Private property is a legal concept defined and enforced by a country's political system.

Private property (disambiguation)

Private property is a legal designation for the ownership of property by non-governmental legal entities.

Private property may also refer to:

Private Property (1960 film), an American film starring Kate Manx, Warren Oates and Corey Allen.

Private Property (2006 film), a French-language Belgian film directed by Joachim Lafosse.

Property

Property, in the abstract, is what belongs to or with something, whether as an attribute or as a component of said thing. In the context of this article, it is one or more components (rather than attributes), whether physical or incorporeal, of a person's estate; or so belonging to, as in being owned by, a person or jointly a group of people or a legal entity like a corporation or even a society. Depending on the nature of the property, an owner of property has the right to consume, alter, share, redefine, rent, mortgage, pawn, sell, exchange, transfer, give away or destroy it, or to exclude others from doing these things, as well as to perhaps abandon it; whereas regardless of the nature of the property, the owner thereof has the right to properly use it (as a durable, mean or factor, or whatever), or at the very least exclusively keep it.

In economics and political economy, there are three broad forms of property: private property, public property, and collective property (also called cooperative property).Property that jointly belongs to more than one party may be possessed or controlled thereby in very similar or very distinct ways, whether simply or complexly, whether equally or unequally. However, there is an expectation that each party's will (rather discretion) with regard to the property be clearly defined and unconditional, so as to distinguish ownership and easement from rent. The parties might expect their wills to be unanimous, or alternately every given one of them, when no opportunity for or possibility of dispute with any other of them exists, may expect his, her, its or their own will to be sufficient and absolute.

The Restatement (First) of Property defines property as anything, tangible or intangible whereby a legal relationship between persons and the state enforces a possessory interest or legal title in that thing. This mediating relationship between individual, property and state is called a property regime.In sociology and anthropology, property is often defined as a relationship between two or more individuals and an object, in which at least one of these individuals holds a bundle of rights over the object. The distinction between "collective property" and "private property" is regarded as a confusion since different individuals often hold differing rights over a single object.Important widely recognized types of property include real property (the combination of land and any improvements to or on the land), personal property (physical possessions belonging to a person), private property (property owned by legal persons, business entities or individual natural persons), public property (state owned or publicly owned and available possessions) and intellectual property (exclusive rights over artistic creations, inventions, etc.), although the last is not always as widely recognized or enforced. An article of property may have physical and incorporeal parts. A title, or a right of ownership, establishes the relation between the property and other persons, assuring the owner the right to dispose of the property as the owner sees fit.

Right to property

The right to property or right to own property (cf. ownership) is often classified as a human right for natural persons regarding their possessions. A general recognition of a right to private property is found more rarely and is typically heavily constrained insofar as property is owned by legal persons (i.e. corporations) and where it is used for production rather than consumption.A right to property is recognised in Article 17 of the Universal Declaration of Human Rights, but it is not recognised in the International Covenant on Civil and Political Rights or the International Covenant on Economic, Social and Cultural Rights. The European Convention on Human Rights, in Protocol 1, article 1 acknowledges a right for natural and legal persons to "peaceful enjoyment of his possessions", subject to the "general interest or to secure the payment of taxes".

Taxation as theft

The position that taxation is immoral because it is a form of theft is a viewpoint found in a number of newer radical political philosophies, such as American libertarianism, and marks a radical departure from conservatism and classical liberalism. Voluntaryists, anarcho-capitalists, as well as Objectivists and most minarchists and libertarians see taxation as a clear violation of the non-aggression principle.Under this view, government transgresses property rights by enforcing compulsory tax collection, regardless of what the amount may be. Some defenders of taxation argue, on the other hand, that the notion of legal private property rights only exists within the legal framework of the state. Without a source of income, the state would be unable to enforce property law, and legal concepts such as theft and property rights, would essentially be rendered meaningless. Therefore it can be argued that the "taxation is theft" view is self-defeating unless the state can generate income through other means than taxation, such as state-owned business enterprises, or if the state is wholly paid for and operated by volunteers. Many opponents of taxation, like Michael Huemer, would respond to this by suggesting that private property rights exist independently of the state, and that it would be morally wrong to steal whether the state exists or not. He also points out that this principle would lead to the conclusion that slave owners had legitimate property rights over their slaves in the early nineteenth century.

Transaction cost

In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market.In Transaction Costs, Institutions and Economic Performance (1992), Douglass C. North argues that institutions, understood as the set of rules in a society, are key in the determination of transaction costs. In this sense, institutions that facilitate low transaction costs, boost economic growth.Douglass North states that there are four factors that comprise transaction costs – "measurement," "enforcement," "ideological attitudes and perceptions," and "the size of the market." Measurement refers to the calculation of the value of all aspects of the good or service involved in the transaction. Enforcement can be defined as the need for an unbiased third party to ensure that neither party involved in the transaction reneges on their part of the deal. These first two factors appear in the concept of ideological attitudes and perceptions, North's third aspect of transaction costs. Ideological attitudes and perceptions encapsulate each individual's set of values, which influences their interpretation of the world. The final aspect of transaction costs, according to North, is market size, which affects the partiality or impartiality of transactions.Transaction costs can be divided into three broad categories:

Search and information costs are costs such as in determining that the required good is available on the market, which has the lowest price, etc.

Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on. In game theory this is analyzed for instance in the game of chicken. On asset markets and in market microstructure, the transaction cost is some function of the distance between the bid and ask.

Policing and enforcement costs are the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to be the case.For example, the buyer of a used car faces a variety of different transaction costs. The search costs are the costs of finding a car and determining the car's condition. The bargaining costs are the costs of negotiating a price with the seller. The policing and enforcement costs are the costs of ensuring that the seller delivers the car in the promised condition.

Willingness to accept

In economics, willingness to accept (WTA) is the minimum amount of money that а person is willing to accept to abandon a good or to put up with something negative, such as pollution. It is equivalent to the minimum monetary amount required for sale of a good or acquisition of something undesirable to be accepted by an individual. Conversely, willingness to pay (WTP) is the maximum amount an individual is willing to sacrifice to procure a good or avoid something undesirable. The price of any goods transaction will thus be any point between a buyer's willingness to pay and a seller's willingness to accept. The net difference between WTP and WTA is the social surplus created by the trading of goods.

Several methods have been developed to measure consumer willingness to pay or accept payment. These methods can be differentiated whether they measure consumers' hypothetical or actual willingness to pay or accept and whether they measure consumer willingness to pay or accept directly or indirectly.

Choice modelling techniques may be used to estimate the value of the WTP or WTA through a choice experiment.

Unlike WTP, WTA is not constrained by an individual's wealth. For example, the willingness to pay to stop the ending of one's own life can only be as high as one's wealth, while the willingness to accept compensation to accept the loss of one's life would be an extremely high number (or maybe infinite, meaning that there would be no finite acceptable payment amount).

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