Economics For Dummies, 4th Edition

Chapter 10

Property Rights and Wrongs

IN THIS CHAPTER

Defining an ideal market

Seeing how externalities create socially inefficient outcomes

Taking steps to fix problems caused by externalities

Exploiting and exhausting commonly owned resources

Economist Adam Smith came up with the invisible hand, the idea that even though individuals pursue their own interests, the common good is achieved if you allow markets to allocate resources. Smith was quite aware, however, that you achieve this nice result only if society’s property rights are set up correctly before people start to trade goods and services in markets. In fact, he spent a good deal of his most famous book, The Wealth of Nations, talking about how governments must properly define property rights if they want markets to yield to socially beneficial outcomes. (Chapter 7 discusses this idea in more depth.)

The gist of the problem is that if property rights aren’t set up correctly, a person won’t fully take into account how their actions affect other people. For instance, consider two pieces of land. One is privately owned, and ...