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Markets and property rights

In order for markets to function effectively, property rights must be clear. In this video, we explore the idea of property rights, and why they matter in markets and how they affect individual incentives. We describe some of the conditions that are necessary for a properly and efficiently operating market to exist, including how exclusivity, enforceability, and transferability of property rights are essential for a properly functioning market.

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Video transcript

- [Instructor] In other videos, we have touched on the idea of property rights, but in this video, we're going to go a little bit deeper, and think about how property rights connect to the notion of a market. So, first of all, think about what a market means to you. You have probably heard of things like the stock market or you have probably gone to a supermarket to do your groceries. What's common about these things? Well, if we wanna say as broad of a definition of a market, you could view it as a market forms, let me write this down. Well, this is an informal definition. Forms, when multiple parties, multiple parties, exchange things of value. Exchange things of value. And let's see whether our notions of a market hold up or whether this definition holds up when we think about our notions of a market. Well in a stock market, you have a bunch of people together, and they are trading stocks, and usually what happens is, let's see if this is a stock right over here, these are all different shares of the same stock or different stocks, what typically happens is if there might be parties who want to sell this stock and then there's other parties who want to buy this stock and then whoever of the buyers is willing to offer the most for that share, well then that money will go to the seller of the stock and then that stock will go to the party that just paid that amount. And so you see that there's an exchange of things of value. At a supermarket, you will see aisles and aisles of goods. This is my drawing of a aisle of goods, and there's all sorts of merchandise on 'em and you put 'em in your shopping cart and then when you're done, you go to the checkout, this is my little shopping cart here. You go to the checkout and you pay for them. So once again, you are picking which items you want. There's a price on them, so the seller which in this case is the supermarket, tells you what they're willing to take for those items and then when you put them in your cart and then take it to the checkout, that's you agreeing to pay those prices and so you exchange, once again, money for those things of value. So the money has value and those groceries, whatever you're buying, might have value. Now, we tend to believe that markets are the best way of allocating resources and different markets work different ways. As you could just see, the stock market could be very different than a supermarket and then you could have an auction where things are auctioned off. That would also be a form of a market but the actual mechanics of how things happen would be a little bit different. But a key factor that you need in order for markets to function properly is that you need to have a notion of property rights, and as we've talked about in previous videos, property rights are the idea that things can be owned. Now what does it mean to own something? We almost just take this for granted but it's not some law of the universe, it's something that we just assume culturally and it's become so embedded in us that we just say of course you can own something but at the end of the day, there's three real properties to owning something. One is the idea of a party being able to exclusively own something. So let's say that you own a piece of land that you want to farm on. Well that means that you can exclude others from using that land and whatever that land produces. It might just be a fun place for you to run around or sunbathe or it might be a place where you grow some food that you have the rights to the benefits of that thing. Now another key dimension of property rights is that those rights have to be enforceable. Enforceable. What does that mean? Well, if someone obnoxious wants to come and sunbathe on your property that you have enjoyed running around and sunbathing on, you say hey, you're infringing on my property rights and you should be able to call the police or some type of enforcers to take that person off your land if you really do have property rights and if they are truly exclusive. Or let's say you have property rights on your shoes and if someone were to steal your shoes, you should be able to call the police and say a crime has been committed and the police should enforce those property rights. They should go and get those shoes back and punish that shoe stealer in some way and then last but not least, in order for markets to work well, those property rights have to be transferrable. Remember, a market is all about transferring property rights. In the stock market, one party is giving, is transferring their property rights to that money to the seller of the stock in exchange for getting the seller of the stocks property rights to the actual stocks. If this was not transferrable, then it would actually make no sense to have a market as we know it. So I'll leave you there. These are things in our daily life that most of us take for granted because we live in a market economy and we are used to things like ownership but there are definitely ways of organizing society where it's not as based on markets in terms of who gets what and even today, markets in many sectors or in many parts of the world don't operate as well as they could because some of these dimensions of property rights aren't working as properly as they should. It might be hard to transfer property rights in certain markets. In certain markets, if someone, let's say, just takes over a property, the government might not be so good at enforcing those property rights. Or it might be hard to keep one party from using something of value that is, at least according to the property rights, owned by someone else.