Definition of Property Rights
Property rights refer to the establishment of who has the legal and intellectual authority to use what assets and resources. As well as intangible resources, the owners of these assets and resources may also include persons and corporations. The rights of private persons to collect, delegate, sell, rent, or hold their property can be determined by individuals in a variety of countries, including developed ones like the United States and the United Kingdom (Lahsen & Piper, 2019). Property rights are essential in the financial sector since they form the basis for all market activities. The quality of resource use has an impact on a community’s property rights.
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Why Lack of Well-defined and Enforceable Property Rights is Detrimental to the Smooth Functioning of a Market System
The smooth running of a market system is threatened if property rights are not clearly established and enforced. Uncertainty over property rights can lead to a market failure, according to Lahsen and Piper (2019). There may be unanticipated consequences for third parties that are not reflected in the transaction values when there is market failure in this scenario (Lin & Wu, 2021). There is no way to make efficient use of resources without private property rights. People or groups can take advantage of the lack of private ownership when property rights are absent. This can have a variety of negative consequences. Because a song cannot be enclosed, other people can “steal” the melody and lyrics such a song. Music tracks can be easily copied utilizing current technologies without costing money. Again, the price mechanism fails to accurately price readily stolen things, as shown by the free rider conundrum (Lin & Wu, 2021). The end result of this is to encourage the demise of a market.
According to Wu & Tang (2016), a market system’s ability to function smoothly is jeopardized by a lack of clearly defined and consistently enforced property rights, which increases the likelihood that scarce resources would be misused. When people believe that someone else will pick up their trash or clean up the water, or no one will ask them about anything even if they misused some properties – the moral hazard increases in the market. When one party’s actions alter to the detriment of another after a financial transaction, there is a risk of moral hazard. Adverse selection and moral hazards are consequences of economic imbalances produced by unequal information. Market collapse is possible as a result of any of these faults in the economy (Wu & Tang, 2016).
Lack of property rights is also linked to resource overuse, such as deforestation, overfishing, and gridlock. Overuse can also deplete other natural resources, such as fish stocks and the environment. Because so much of the environment cannot be protected through the creation of property rights, it is a limited resource that can be squandered at will. The market suffers as a result of the depletion of these resources, which contribute to fiscal revenue, income, and the elimination of poverty. Employment in natural resource-related businesses is common in low-income areas. Due to the inherent worth of natural resources, they must be managed sustainably through the use of property rights. According to Wu & Tang, (2016) the smooth running of a market system is threatened if property rights are not clearly established and enforced. Inadequate property rights are linked to urban squalor and are a severe barrier to economic growth (Wu & Tang, 2016).