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Video transcript

in this video we're going to talk about an idea that's crucial to the proper functioning of an economy under a market-based system and that's the idea of property rights and it's just the idea that everyone agrees on who owns what and what can they do with that property and for many of us who live in a part of the world with strong property rights we take all of that for granted we know who owns that house and what they have the right to do with that house and if they were to sell that house how that would occur but in some parts of the world or in some parts of history that wasn't so clear someone might say they owned the house but then another person might live in that house and they say well I've been living here for ten years it's my house now deal with it or they might go hire some thugs to say hey owner sell me the house for a less than you then then the market value otherwise we're going to hurt you in some way and so in some ways that are infringing on those property rights so the government might just come in and say we're gonna take that property from you because we want it and those situations property rights would be weakened and what we're going to do is a little bit of a thought experiment to see why it's so crucial for the proper functioning of a market economy so let's stick with the house analogy so let's say that we have some blue houses in our in our economy that looked like that let's say it's owned by this person right over here let's say we have some pink houses that look like that let's say it's owned by that person right over there and let's say that we have some orange houses that look something like that maybe they have some kind of arch at the top and let's say it's owned by something like this and let's say these people are all interested in selling their house maybe they're downsizing or they're retiring or they're moving someplace else and so there's a market of potential buyers so let me draw the buyers right over here and so there might be some people and if we have properly functioning property rights there might be some people who are really interested in the blue house and so whoever is willing to pay the most for that blue house will get it and so let's say that this person is willing to pay I'll to say one dollar sign for the house and so the the ownership of the house will go to that person same thing for the pink houses maybe this person right over here the person who really likes the pink houses they pay a different price maybe a little bit more I'll do two dollar signs to represent that and then they will get title to the house and maybe a ton of people are really interested in these arched houses and maybe they'd be it for it and the bidding keeps going higher and higher and higher this person wins at the end and they have to pay up a lot for that orange house and then they get title for it and let's just assume that for whatever reason that they're all about the same cost to build well what would happen in this market then well home builders or even people who and other types of houses will say wow I can get a lot more for the orange house the market is giving us a price signal so this right over here this is a price signal in fact there are all price signals that and when you take them together you're saying hey I get more for an orange house than a blue house and so maybe if they all cost the same to build we'll start producing more of these orange houses so the builders will produce more of these orange houses and maybe some people might remodel their blue houses to have these orange arches on them and so you could imagine that might happen from that price signal because it's clear that that's where users preferences are that's where the demand is but now let's imagine a slightly more dystopian world and this actually is what much of human history was and even some significant parts of the world today where there aren't clear property rights when this person says they want to that they have this house for sale these people are life is it really your house and then this person comes along says no it's my house and I have this proof that my grandfather owned it and he never sold it to your grandfather and then this person says I have a lot of guns and I don't care what y'all say and what paperwork you have but I'm taking the house well how much would this person be willing to pay this person right over here in that circumstance and so this person is much less likely to get these three dollar signs this person says hey this kind of a risky investment I don't really know if I take title from this person whether it's still my house so they're not willing to give three dollar signs they're only give willing to give one dollar sign or maybe no dollar signs maybe this house doesn't even sell well then the price signals have broken down and so then in this market people won't say oh maybe we'll build more of the the arched orange houses because that's what the market demands and so you can quickly see that when property rights break down the market system breaks down because the market system is all about people using a price to figure out how much they're willing to pay for things but that assumes that when you get something that it's really yours that it's not going to be disputed and the person you're buying from really has ownership and this breakdown would often be characterized as a market failure now you could say okay there's other types of systems that we talked about in other videos we talked about command economies and in the extreme and a command economy you have no profit you have no private ownership of things and so you might say maybe that is a solution to this property rights problem but command economies have significant problems of their own in fact very few of them are really none of them in history have proven to really work because they have a major incentive problem because if you're just being told what to build by the government you're told how to build it by the government you're told who to gets it by the government there's very little incentive to try to innovate to try to build more to invest or whatever else and we talked about that in other videos so I will let you go there this is just the introduction to think about this idea of property rights and ask your parents or talk around or if you are a parent look at the world of how much infrastructure we have in a society like the United States or in much of the world today to enforce property rights
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