In economics, goods are divided into “public goods” and “private goods” to facilitate discussion; there is no clear boundary. More generally, even the concept of “scarcity”—which defines the boundary of economics—is not absolute. In the real world, there is a continuous spectrum between two seemingly opposing concepts. The discussion of this middle will facilitate our understanding of concepts at both ends and allow us to avoid replacing reality with concept, or tilting at conceptual windmills.

Besides corresponding to government and market, the concepts of “public goods” and “private goods” also have meaning in property right systems: private goods are appropriately owned via personal and exclusive property rights, while public goods are not. There is no clear line, but factors that determine economic goods become public or private goods will inevitably affect the nature of the property rights that can be exercised over it. We can even imagine that there is a transition zone between the two: when these factors change, goods can change from being public goods to private goods, or vice versa.

Debate on whether public property rights or personal ones are better often fails to examine the conditions under which an item becomes public goods or private goods; it also ignores the existence of many intermediate forms. It is difficult—and unnecessary—to strictly define public property or personal property. When we have a better grasp of the scope and boundaries of public and private goods and the transition zone between them, we will be able to establish personal property in a more proper situation and depend on public power in places which are inappropriate for private property. We can abandon the jargon which often gives rise to ideological emotions, and talk about property right arrangement in a more objective fashion.

3.1 Another Reason for Scarcity: Harvesting Costs

When incorporated into the study of economics , both public goods and private goods are first of all economic goods: that is, they are scarce. Scarcity occurs when demand exceeds supply at zero price. However, scarcity is not set in stone. As the human population grows, and we grab more resources from the natural world, we find that resource scarcity or abundance is also changing. The general direction is that scarcity increases: resources that were not scarce become scarce. For example, before Europeans came into America, wild animals were not scarce; it was the European’s fur trade that made the native population begin to divide their hunting areas. Even more striking is the change of water resources. Water was considered an inexhaustible natural gift until industrialization; but after that, people gradually began to feel water scarcity. In the late twentieth century, many rivers have gone dry, forcing people to consider water a scarce resource.

The simplest explanation for this change is that water supply is fixed, while human demand for water continues to grow. Once total demand for water exceeded the total supply, it became scarce (see Fig. 3.1). This is of course an explanation, but not a comprehensive one.

Fig. 3.1
figure 1

Increased demand for water producing scarcity

Note: Because the supply of water is fixed, the supply curve is a vertical line S; the aggregate growth in total demand is shown as the demand curve moving from D1 to D2. The intersection of D2 and S indicates that at zero price total demand is greater than total supply, producing scarcity

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The process of obtaining a natural resource has two requirements: one is the resource itself, another is action taken to obtain that resource. The feeling of scarcity thus does not arise simply from the fact that overall human demand is greater than absolute supply of nature. The first part is influenced by pure supply and demand for resources; the second part is influenced by the cost of actions to access resources. Intuitively, if a person wants to obtain a product by buying it, he needs to do two things: One is to buy this product at the store; another is to get the product home. The price of the product corresponds to its scarcity; the freight corresponds to the scarcity of resources expended by transportation. Thus, even if a resource is scarce, as long as the costs of obtaining this resource are sufficiently high, the resource may not be scarce. Here, the scarcity of resources can be understood as the price of the resource determined by supply and demand under the condition that harvesting cost is zero (Fig. 3.2).

Fig. 3.2
figure 2

Harvesting cost and scarcity

Note: When the cost of drawing water is high (see harvesting cost curve 1), the water supply amount Q’ intersected by curve 1 and the demand curve is below the long-term supply equilibrium of Q0. When the cost of drawing water is lower (see harvesting cost curve 2), the water supply amount Q” intersected by curve 2 and the demand curve is above the long-term equilibrium supply Q0. This illustration can be also used to illustrate the apple example. Q0 represents the supply of 5 apples, and 10 people’s demand for apples is 10 (Q1). If these apples are placed one kilometer away, the harvesting cost exists. As harvesting costs differ for different people, their synthesized cost curve is equivalent to harvesting cost curve 1. This curve intersects at E1 with the demand curve; on the right side of E1, people are unwilling to get apples as the harvesting costs are higher than apples’ utility. Therefore, the demand for apples is at Q’, which is lower than the supply amount Q0, and thus it does not look scarce. When these 10 people have vehicles, the harvesting costs fall (see harvesting cost curves 2), and the equilibrium amount Q” intersected with the demand curve at an amount greater than the supply of five apples (Q0), there is scarcity. P0 is the extent of scarcity of that resource (water or apple)

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Suppose there are ten people and five apples, and everyone wants an apple. Apples are apparently scarce. But if these 5 apples are placed 1 kilometer away from the 10 people, it would appear less scarce, for some people might prefer not to eat an apple rather than walk the distance. Strictly speaking, they think that the cost of walking a kilometer is greater than the utility of an apple. The distance here is symbolic: its length represents the cost of access to resources.

Such situations are very common in the real world. For example, before reform and opening, Beijing’s streets were not as crowded as today, not because there was a small population, but because the cost of using streets—buying a car—at the time was beyond the reach of the average person. From traditional society to the early industrialization, the reason why people don’t perceive macroscopic scarcity of water resources may not be that people’s total demand for water was not big enough to exhaust the supply (in the predominantly agrarian Qing dynasty, China already had 400 million people, and agriculture is still the biggest water user today), but because of the high cost of access to water resources: dams, reservoirs, and irrigation canals were much harder to build, so scarce engineering resources suppressed demand for water. In locations close to natural bodies of water, people had much easier access to water resources; in these circumstances it was not water that became scare but locations with good access to water. Conversely, compared with China’s famous—and famously overcrowded—mountains Huangshan and Mount Emei, Mount Everest is not any less attractive. It is the high costs of climbing up Mount Everest that makes it less overcrowded than the former two. If fishing boats were expensive enough, fish resources would not be depleted even if people love eating seafood.

Therefore, using the extent of scarcity of a resource as a standard and supposing there are harvesting costs, if the harvesting cost is higher than the scarcity of the resources at the equilibrium of supply and demand, the resource can be seen as an unscarce natural resource; if the former is lower than the latter, it can be seen as a scarce public resource. Or, use the absolute supply of this resource as a standard and suppose there is harvesting cost, when demand at the equilibrium of supply and demand is lower than the absolute supply of the resource, the resource is not a scarce natural resource; when higher, it is a scarce public resource. If the scarcity of the resource is P0, the absolute supply is Q0; harvesting cost at equilibrium is Pg, and corresponding demand is Qg. If the resource is natural and not scare, then Pg ≥ P0 or Qg ≤ Q0; if the resource is scarce, then Pg < P0 or Qg > Q0 and it may be considered a public resource. When a resource is not scarce, it means that there is no tension between resource and human, and no tension and conflicts exist between men, and thus it has no public character, just as no one regards the air as a public resource. Provided they are not scarce, resources are the thing-in-itself and they are “natural”; as long as there is scarcity, there will be conflicts between individuals. To resolve the conflicts is a matter for public life.

In fact, harvesting cost—the key factor that decides whether or not a resource is a “non-scarce natural resource” or “a scarce public resource”—is a variable. With the development of human technology, the cost of access to resources is decreasing. Consider the example of the remote apples. Now assume that those who want to eat have cars and it takes them less than 1 minute to drive 1 km. The reduction of harvesting costs clearly means that more people will try to eat the apples—and 5 apples will seem scarce for 10 people. When the cost of access to a resource falls below a certain point, the scarcity of resources used to obtain the first resource will be lower than the scarcity of the resource itself. At this time, the scarcity of first resource is revealed. “Non-scarce natural resource” will become “scarce public resources.” This is common in modern society. With the development of shipbuilding and electronic detection technology, unit fishing costs have been significantly reduced, which contributes to depletion of inshore fish stocks in many countries. With the development of engineering technology, unit costs for water diversion projects have also been reduced. Lots of large water diversion projects supported by the state have been built across rivers and reservoirs, one after another, each with a significant impact on the rivers’ water volume. When the unit cost of the water diversion project fell below the scarcity of water resources itself, the macro-scarcity of the water resource appeared. In the absence of public control and effective property rights, there will be overuse of water resources and drying up of rivers.

This phenomenon is clearly a paradox of human society: People pursue technological progress in order to be more efficient and save costs, but the decline of harvesting costs brought by technology makes resources scarce. In the absence of appropriate institutional arrangements, the resource depletion caused by competition for scarce resources is not efficient.Footnote 1

3.2 Labor Costs and the Nature of Property Rights

The word “resources” is used here to refer to natural resources, which means no human behavior is necessary for the resource to exist. “Access to resources” is understood as all human activities imposed on natural resources, which is what we usually call “work.” From the perspective of inputs, there is no essential difference between “activities to obtain resources,” “activities to use resources,” and “activities to process resources”—all require human physical and mental work. There is no essential difference between them if viewed from the perspective of results: all make resources suitable for human consumption. In this sense, fetching an apple from 1 km away, sowing in spring and harvesting in fall, heating ore to get metal, or processing resources physically, chemically, or mechanically to create a product, amounts to the same thing.

Although “resources used to obtain resources” also include resources other than labor, such as capital resource or other natural resources, they can be reduced to natural resources and labor. Therefore, we can take all economic activities as a combination or complementation of natural resources and labor. Rather than the usual practice of listing natural resources and labor in parallel, in this chapter, it is assumed that it is only through labor that people can obtain natural resources. This argument is right in most cases with only two exceptions: one is air, the acquiring of which generally does not need any labor. Another is labor which does not involve any natural resources, such as transactional activity, the object of which is another person. If we distinguish trading activities and production activities, “labor” here refers to production activities.

Since natural resources can only be obtained through labor, labor can be considered a specific means to possess resources. The nature of labor itself and its scarcity will affect the means of ownership and legal relationships with natural resources. The biggest difference between natural resources and labor—also a resource—is that labor has a natural owner and natural resources do not. Labor originally belongs to the one who performs it—the laborer. Laborers are individuals, which means individual is the basic unit of cost or utility. Thus, activities obtaining resources through labor have a natural logic, which lays the foundation for a legal form in which resources are possessed by individuals.

However, for different natural resources, or different uses of natural resources, the cost of labor is different. This will also affect the nature of the property rights over natural resources. Let’s continue with the story of the apples. This time, the apples grow on trees, which have no owner. If an apple tree has no owner, two people living nearby will compete to pick apples, and will pick the tree clean before any of the fruits ripen. This is a typical “tragedy of the commons” scenario. More strictly speaking, it is the result of scarce public resources in the absence of property rights or common control. However, let’s say that our tree grows—one meter, then two, then three, then four, and so on. As the tree grows, it becomes harder for people to pick the apples, until it becomes so troublesome to pick the highest apples that at least one apple is left on the tree. At this point, apples are no longer scarce for the two people, and there will not be a “tragedy of the commons”—both will wait until the apples ripen.

What is the reason? First, as mentioned in the previous section, when the difficulty of obtaining the resource is higher than the scarcity of the resource itself, people do not feel the resource is scarce; there is no “tragedy of the commons” for non-scarce resources. The second reason is that, in most cases, obtaining resources through labor naturally forms the basis of possession. You own the apple you picked. There is no ambiguity. Even in the absence of a formal property rights system, the two sides can live together peacefully. In fact, it could be just such a situation that naturally formed the later property system. Labor, as an important fact that forms the basis of property rights and provides a source of legitimacy, has rarely faced suspicions. The formal legal system is just a confirmation of this natural ownership.

In this way, two kinds of economic objects and their corresponding concepts are divided by their labor costs. If the labor cost is higher than a certain threshold, it is a scarce natural resource and its possession and subsequent property rights will form naturally through labor; if lower, then this natural resource becomes a scarce public resource. In this case, the labor involved obtaining the resource will be overcrowded, resulting in the loss of efficiency for the whole society, and thus it does not naturally form lawful possession of the resource, nor legal property rights. This threshold scarcity of labor equals the scarcity of the resource, or to put it in another way, the threshold occurs where the marginal cost of labor is equal to the marginal utility of this resource. This also shows that the right to possess natural resources not only comes from labor; in addition, the fact that the cost of labor itself is large enough to make a scarce resource not worth exhausting, preventing inefficient “tragedy of the common”-type outcomes, is an important condition for the legitimacy of this right. Conversely, if the cost of labor is low compared to the scarcity of the natural resource, the natural resource appears scarce, and labor itself does not constitute the basis for the legitimacy of the possession of the resource.Footnote 2 For example, gold mining is complicated labor, but the scarcity of labor of gold mining is generally lower than the scarcity of gold itself. Therefore, the gold mine is a scarce public resource; free access to the gold mine will make it overcrowded (Fig. 3.3).

Fig. 3.3
figure 3

Nature of scarcity and property rights based on labor

Note: For simplicity, assume that the marginal cost of picking apples is constant, and thus the cost curve is a horizontal line. Q0 is the quantity of apples on the tree, or the amount of natural resources. When C0 is the marginal cost of climbing for a person, the cost of picking Q0 apples cost C0 is just equal to the marginal utility of apply Q0 for him. When marginal cost of picking apples is less than C0, the marginal cost of an apple Q0 is lower than the marginal utility from that apple. Therefore, people will pick more apples. However, at this time all apples will be picked, so apples are scarce. If individual property rights to apples are based solely on labor, apples will be overexploited. When the marginal cost of picking apples is higher than C0, the marginal cost of an apple Q0 is already higher than the marginal utility; therefore, people will not pick more than Q0 apples, so it does not appear scarce. At this point, individual property rights can be established based on labor

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When natural resources are not scarce, obtaining resources based on labor can make people live together peacefully and achieve efficient results, and establishing property rights based on the rule of labor is natural. By “natural,” we mean that there are no conflicts between people and the cost is very low, and that there is no need for the intervention of a government. Government intervention occurs only because, after the formation of property rights, collisions may occur based on the property rights, such as theft, robbery, or fraud. Conversely, if the government does not acknowledge the labor principle in the case of non-scarce natural resources and establishes another property rights system, its costs will be greater than the system based on labor.

But for scarce public resources, labor cannot be used as the sole basis of establishing property rights. What kind of rule is more appropriate? One way is through negotiation. For at least two reasons, this method is not universally used. First, negotiation frequently fails to reach consensus, and in the absence of authority, people may choose other means, including violence, to obtain resources. Second, when the amount of people competing for scarce public resources is considerable, negotiation becomes even more unlikely. In some cases, people may use the same resource without meeting, such as those living upstream and downstream on the same river. In fact, in the absence of a superior authority, negotiation has an important prerequisite: the balance of the parties. In the absence of this prerequisite and in an anarchic world, people tend to use violence. We see this very often in history: tribes or states start wars to fight for land or other resources. Oil, the key strategic resource of the world today, is also an important cause of war. It is for the above reasons that, in the case of scarce public resources, government is involved in establishing property rights. Firstly, when parties are unable to reach an agreement, the government can give an at least ostensibly impartial decision, so that more people are willing to solve the issue through negotiations. Secondly, when the number of competitors for resources is large, government can reduce the cost of negotiations as an initiator, organizer, or core negotiator, to make sure negotiations can actually be achieved. Thirdly, as organization that wields legitimate violence, government can replace illegal violence because of its impartiality and its improvement of social efficiency.

3.3 Forms of Natural Resources, the Human Senses, and Exclusiveness Costs

Shepherding on public land is the locus classicus of the tragedy of the commons. However, if the sheep did not immediately consume the grass they live on, the tragedy might not happen. There are times when people “obtain” natural resources and do not immediately consume them; instead they “hold” them for a period. If natural resources are used as assets and people look forward to their production and proliferation, we must hold it permanently. There is a cost for this “holding.” Holding costs and harvesting cost are different: the former in the broad sense is a kind of transaction cost, arising from a relationship between people; while the latter reflects the relationship between mankind and nature (e.g., how high is the tree we need to climb). We want to “hold” resources to prevent other people from taking them.Footnote 3 The “exclusiveness” we often speak of in economics is related to holding costs. Clearly, the lower the holding cost, the stronger the exclusiveness. Therefore, holding cost can also be called an “exclusiveness cost.”

There are several factors that affect exclusiveness costs. First is the holding time. Other conditions being equal, the longer you hold something, the more it costs. Back to the shepherding on public land story: The sheep eat grass directly from the ground, and there is almost no time between “obtaining” and “consuming.” So the holding time is almost zero, and the cost is very low. If the sheep snap off the grass, put it on the ground until it dries to a certain level, and then eat it, the holding cost will increase. To prevent the other sheep from eating their grass from its place on the ground, the sheep or the shepherd will have to watch the grass. This will significantly reduce the amount of grass the sheep eat. The increase of exclusiveness costs is comparable to the increase of harvesting costs; at some point the sheep, or the shepherd, think that the marginal cost of holding the grass is higher than the marginal utility of the grass itself, and thus reduce the amount of grazing. Considering that sheep are ruminants is very interesting. To put some resource into one’s stomach establishes ownership of that resource, no matter what the legal provisions are. But sheep eat not because they are hungry, nor do they digest immediately after eating. Instead, they store food in their stomach, and enjoy them at an appropriate time. This biological structure clearly lowers holding costs, which enables the sheep to enjoy more grass. Animals can use their stomach to store food not only for themselves. Most birds store food and spit it out for their children when they get home.

From another perspective, to put the natural resource into the stomach is apparently the most secure way of holding resources naturally. It also reveals two other factors affecting the exclusiveness cost: the nature of holding objects and subjects. The nature of the object is the main body for the natural resource itself. Broadly, natural resources not only take the form of visible solids, they may also be flowing liquid, fizzy gas, invisible waves, abstract text or numbers, or even information. These different physical and non-physical forms have a significant impact on harvesting costs and exclusiveness costs.

Visible solids have definite borders, which makes it easy to identify and define them, and easy to control them. This makes the exclusiveness cost low. In contrast, liquid flows have no clear boundary, and thus they are more difficult to define and control. The usual way is to put the liquid into a solid container, such as a beverage bottle, box, or water storage reservoir. Containers also make liquids available for use. From an institutional perspective, a container is the holding mechanism of the resource. Manufacturing containers is a kind of activity or labor that facilitates holding resources and the liquid in the container is the resource itself. Moving along the spectrum, it is impossible to define and control borders for air. Although, in general, air is not scarce, it can still be used by manufacturing containers, such as balloons or other inflatable balls. The example of air shows that, even if a resource is not scarce, if there are exclusiveness costs, the end use of the resource can still be scarce. For invisible waves (such as electromagnetic spectrum) and digital resources (such as a phone number) that do not even have a physical form, the problem is even more serious, because there are no containers for waves or numbers.

Finally, there is intellectual property. Using the dichotomy of “natural resources” and “labor,” natural resources are infinite for knowledge. They are the universal things and social phenomena that people can perceive. But the labor that processes this natural resource is costly, because the skills required are extremely scarce. The original owner of knowledge—the product of labor—is very clear, that is, the “laborer” themselves. However, as a kind of natural resource, information lacks boundaries, and the knowledge that results from processing information is still a form of information. Although the processor of the information has exclusive control of knowledge at the moment of its conception, if he or she wants to benefit from this very valuable product, the knowledge must be spoken out or written. Once that happens, its border is very hard to defend, because the cost of replicating knowledge products is very low.

Another factor affecting exclusiveness costs is the manner of consumption. Resources are largely consumed by human sense organs. Different sense organs consume different resources and different amounts of resources, and thus have different exclusiveness costs. For those that can directly consume resources, such as consumption of food through the mouth and solid items through the hand, exclusiveness costs are low. Other sense organs such as eyes and ears enjoy natural resources mainly through watching and hearing. This does not preclude other people from watching and hearing, and one person’s watching or hearing does not harm other persons’ watching and hearing. People can obtain sights and sounds at a low cost, but they cannot hold sights and sounds. In other words, the exclusiveness cost is very high.

Like harvesting costs, when the exclusiveness cost is low, it will produce a tragedy of the commons, just like the sheep grazing. But when the exclusiveness cost is high enough—that is, when the marginal cost is greater than or equal to the marginal utility of the resource—the natural resource will appear to be less scarce. At this time, if the harvesting cost is lower than the scarcity of the resource, effective individual property rights cannot form naturally. This is because the exclusiveness cost is too high. Although individuals may be able to obtain a resource at a low cost, it is hard for them to hold a resource in a natural state without others taking it away. A typical example is radio spectrum. In “The Federal Communications Commission,” Professor Ronald Coase describes the scene of the crowding of the radio broadcasting spectrum, which is caused by this reason (1994). In comparison, investing in a radio station, that is, obtaining radio resources, has a low cost, and holding this resource and not allowing infringement costs more, therefore radio stations infringe each other’s frequencies. In the long term, if resources obtained are always infringed, people will have no incentive to obtain those resources. This is one of the reasons why, before the development of laws to protect intellectual property, people had little incentive to develop technology.

Most natural resources have relatively high exclusiveness costs. Today, personal property is universal because people create a lot of technologies and systems that reduce exclusiveness costs. Clearly, houses and yards expand the scope of holding, as walls (fences and barbed wire), doors, and locks are all related technologies. Without these technologies, the scope of personal property would be very limited. We call this property rights-related technology . These technologies can even reduce the exclusiveness costs of sights and sounds. Theatres, stages, or cinema (a type of fence) “hold” sights and sounds. Even the natural landscape can be held through fences and generate exclusive “holding.” If anyone wants to visit the famous mountain Tai, he must buy tickets at the red entrance door or the entrance in the Out Sky Village. The lock is associated with the door, except that it works when no one watches the door, thus further reducing exclusiveness costs. Today, walls, doors, and locks can be understood in broad terms. Locks can lock not only car doors, but also the engine or the steering wheel to keep others away. Computer or e-mail passwords are also locks—with an electronic key—which can protect electronic documents (particularly finance-related files, such as e-banking account) from being violated at a lower cost.

When the resource has a large amount and a large body, and geographically scattered in different places, it is beyond a person’s ability to hold it, despite his use of the property-related technology. For example, one cannot actually “hold” a piece of land. Human beings as a whole of society can reduce exclusiveness costs through the creation of institutions, to make the individual property rights possible. Therefore, in a society, there might be “property rights” before the existence of the government, but the scope of it will be very small. Only when there is a government enacting laws to protect individual property rights and implementing it, the individual property rights become universal, and the rich also appear. When a person’s property rights (i.e., the resources he holds in the natural state) were violated, he could request protection to the government in order to retrieve the holding of the resource. We call this property rights institutions. At this point, as Commons pointed out, the institutions enlarge the abilities of individuals (1983).

Of course, these technological and institutional efforts to reduce the exclusiveness cost have a limit, that is, it may not be lower than C0 in Fig. 3.4, the scarcity of the resource or the marginal utility at equilibrium. The property rights system formed in this context is called “general property rights system.” It was not specially created by the government. If the exclusiveness cost is lower than C0, we know that it is a scarce public resource, and a better choice is a special creation of property rights system or public control specially created by the government. We will discuss this issue in detail in the next section.

Fig. 3.4
figure 4

Nature of scarcity and property rights

Note: assume the harvesting cost is 0. The exclusiveness cost curve is a horizontal line because the holding marginal cost remains the same. At C0, the tipping point, the exclusiveness cost is equal to the scarcity (or marginal utility) of the resource. When exclusiveness cost is lower than C0, the nature of the resource is a scarce public resource; when higher than C0, there are two situations: as long as the harvesting cost is lower than C0 (in this figure we assume it is 0), (1) the portion of resources that is lower than the exclusiveness cost Ch will become scarce in the short term, but in the long run, it will be characterized as a non-scarce natural resource, because people cannot effectively hold it and quit, and thus it cannot naturally form individual property rights.(2) The portion of resources that is higher than the exclusiveness cost Ch is a non-scarce natural resource and can form individual property rights naturally. If the harvesting cost is positive and lower than C0, these “exclusiveness cost” should all be reworded as “harvesting costs plus exclusiveness costs”

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3.4 Tragedy of the Commons, Resource Degradation, and Corresponding Institutional Arrangements

When we talk about scarcity, we generally mean that total demand at zero price exceeds total supply from nature. The total supply generally refers to the absolute physical quantity of a natural resource. A resource comes to seem scarce only if we come across this border. For example, when people pluck all fruits on the trees and they still need fruit, they feel scarcity. Many natural resources are non-renewable, or the regeneration time is very long, such as coal and oil, which will disappear when exhausted. For these types of resources, people anticipate scarcity instead of feeling it after using them up, calculating expected mining years on the condition of known reserves and annual production volume. In general, the expected length of time with which people are concerned is not longer than one person’s lifetime, for example, 50 years. In any case, this expectation is based on the absolute quantity of the resource. For many renewable resources, the limitation of absolute quantity is even clearer, such as many wild plants: if bamboo is cut up, it will grow out in the next year. Because the labor that processes bamboo products is more expensive than the scarcity of bamboo, bamboo is not used up. Some wild plants, such as some kinds of Chinese herbal medicines, may be exhausted in one year, and grow out normally in the next.

Even if it doesn’t affect regeneration capacity, the absolute physical quantity of a resource is a natural constraint which stops the users. Even though there may be congestion in the absence of individual property rights, the cost of congestion is borne solely by the user, without harming the resources themselves. James Buchanan argued in his “Private Ownership and Common Usage” that, in a situation in which there are more than one owner that have multiple, parallel roads, if the road owners can coordinate monopoly pricing, it will achieve an optimal automobile volume; in the case of perfect competition, road owners cannot affect the price, and the competition will bring the price down to the level of zero profit, resulting in congestion. However, congestion costs—that is, waiting time—are borne solely by users (drivers), and road owners suffer no losses (Buchanan 1989). The tragedy of the commons in the story of sheep grazing is similar. The large quantity of sheep will just lead to each sheep eating less grass, and has little impact on the natural resource. According to Buchanan’s discussion, as long as there are individual property rights and monopoly pricing, there will be optimal allocation of resources, inhibiting congestion. Individual property rights plus competitive pricing is a second-best choice, because from the perspective of users, congestion (time) and monopoly prices are substitutional, and congestion does not hurt the regeneration ability of the resource. In fact, as long as the congestion cost is higher than the competitive price, the use of resources without individual property rights (i.e., at zero price) and individual property rights plus competitive pricing are similar, because at this point what decides the amount of use is not price but congestion costs (see Fig. 3.5). People will stop spending at the point when the marginal cost of congestion equals the marginal utility of driving. It is even difficult for us to determine if congestion is worse than non-congestion from the perspective of society. Although the passing time for each car increases, the total amount of cars that pass also increases.

Fig. 3.5
figure 5

Monopoly pricing and competitive pricing plus congestion cost

Note: When there are individual property rights, the monopoly price (Pm) of owners will curb the overuse of resources while keeping his best interest. But the competitive pricing (Pc) can cause congestion. From the congestion cost curve, the demand at equilibrium is Q1, the total price consumers pay is the competitive price plus congestion cost (Cc). This also means that, even if there is no individual property rights, congestion costs can lead people to automatically adjust their consumption of resources. If the excessive use of resources does not harm the regeneration, the congestion cost is borne solely by consumers, and the situation of non-congestion is not any better than congestion. In the diagram, the area of the sum of producer surplus and consumer surplus at congestion a-Pc-g-e is larger than that of a-Pc-f-b at monopoly pricing

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However, if the resource is not a highway or something else whose regeneration cannot be damaged, we cannot draw the same conclusions. For example, pulling up some herbs by their roots means the plant will not grow back. This means that the absolute physical quantity of renewable resource will shrink as people harvest the resource. A more typical example of a renewable resource is animals. With improved hunting skills (i.e., per unit cost of hunting is down), the number of animals captured grows and approaches to the absolute physical quantity of the animal. But the regeneration capacity of animals has been injured. For example, when hunting makes the number of adult animals below a certain level, it will reduce the breeding of this animal group, which will lead to its gradual shrinking and eventual extinction if its natural growth rate (birth rate minus death rate) is less than zero; if young animals are still killed after the adult animals are exhausted, there will be no new animals, and the resource will all but disappear. In short, hunting animals beyond a certain threshold will damage the regeneration capacity of the animal group. This threshold is the equilibrium amount that ensures the stable supply of the animal. Therefore, the real effective supply is not the absolute physical quantity of the fauna, but the absolute physical quantity minus the threshold amount ensuring stable supply of the animal population. The so-called scarcity for such resources is such kind of scenario that the real effective supply is less than demand at zero prices. We can call this tipping point a “long-term equilibrium of supply.”

In this case, a system with no individual property rights (as we’ve defined it, the right to possess or use the resource based on labor), or individual property rights plus competitive price, will not allow the market to generate prices that curb excessive demand. Here the so-called excess of demand is that demand exceeds the long-term equilibrium supply. The long-term decline of the resource resulting from excessive demand and excessive use of resources will become apparent only over a long period of time (such as in 10 or 20 years), to which the current market does not react. People only react to the current supply and demand. Therefore, the price will be pushed as lower than would be appropriate considering the long-term costs. This will not only cause congestion, but also will hurt the regeneration capacity and reduce the long-term supply of the resources. Institutional arrangements such as individual property rights plus monopoly pricing or public authority intervention will not create such abuses, and thus are a better choice.

Compared with public authorities, individual property rights clearly have advantages of motivation. For resources that may be divided, exclusive property rights can even push people to protect the regeneration capacity of the resource, whether there is monopoly pricing or competitive pricing. Historically, exclusive property rights are the most common approach to solve problems faced by hunting communities. Exclusiveness costs are greatly reduced after the domestication of wild plants and animals. People can use fences, walls, or specialized guardians to defend their crops and livestock. This is what Douglas North called “exclusive common property rights.” At this point, if there are markets for crops and livestock transactions, traders will pay attention to renewable capacity. Any rural person knows that hens that can lay eggs are more valuable, as long as a person can own the hens exclusively. This property rights system can evolve from tribal common property to strictly personal property. Livestock slaughter systems overseen by a public authority have existed, and achieved some success, such as in the Inca Empire, but it appears that they paid high prices, such as government corruption, or efficiency losses from the non-tradable nature of the livestock (Prescott 1996, pp. 59–60). These solutions never become mainstream, beyond a certain scope, suggesting that the individual property rights plus monopoly pricing system is better than the intervention public authority.

The so-called certain scope refers to low exclusiveness costs. When the exclusiveness costs of a renewable resource are high enough that individuals or local forces are insufficient to “hold” it, the public authority intervention system has advantages. A typical example is high seas fish stocks. Overfishing can hurt the regeneration capacity of fish and even result in depletion of fish stocks, while in the high seas it is difficult to hold fish stocks exclusively. In this case, the property rights system does not work. For water resources, overuse interacts with the regeneration capacity of other resources. Through the cycle of rivers flowing into the sea, sea water evaporating, vapor drifting, rainfall, then flowing into the sea again, the water resources regenerate as a system. However, if river water is depleted, it results in vegetation degradation and desertification, eventually reducing the regeneration of water resources.Footnote 4 In other words, the threshold amount that ensures normal regeneration or long-term stable supply of water resources is less than the volume of regeneration. However, no individual or group has the capacity to “hold” water resource systems with regeneration mechanisms. As a result, we cannot establish “general property rights” and have to resort to public authority.

Public authority intervention also has several forms, including: (1) controlling channels to obtain resources, or limiting access; (2) creating special property right systems through auction; and (3) establishing total administrative control of the resource. Despite the differences, there are common characteristics in these forms, namely, the increase of harvesting costs . The public goods provided by the government are designed to keep resource usage within the appropriate range, or more strictly speaking, within the scope of long-term equilibrium supply. The usage of the resource will not cause degradation of the resource within this scope.

A concrete example of the first form is the control of marine fishing. The methods of control are generally limiting the fishing period, controlling the use of fishing gear, and so on. Fishing bans for certain periods increase the idle time for fishermen and fishing vessels, which naturally increase costs; limits on nets decrease the efficiency of fishing (Clark 1984, p. 40). Despite the reduced economic efficiency, it provides a necessary restraint on overfishing of marine fish (see the following Fig. 3.6).

Fig. 3.6
figure 6

Control of fisheries through increasing costs of fishing

Note: E is the fishing effort; the bending curve is the amount of fishing and the resulting income which varies with the growth of the fishing effort (assuming the price is not changed). Overfishing will reduce fish stocks, thereby reducing catches. The increase of costs because of the regulation makes the intersection of the cost curve and income curve transfer from A to B, the latter being the equilibrium of maintaining the fish scale invariant. This figure is quoted from C.W. Clark, 1984, p. 40, Figure 2.6

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The second form, which is most widely used, is franchise model that limits the entering quantity—a public authority estimates an appropriate total amount of resource supply. For city traffic, it is a number of cars that do not cause congestion; for fish stocks or water resources, it is the long-term equilibrium of supply. The government sells franchises for the use or development of these supplies through public auction. Under normal circumstances, the franchise price through auctions will make the amount of use or development of franchises equal to the supply quantity limited by the public authority. From a micro view, paying franchises increases costs, which in turn constrains demands on resources; from a macro point of view, such practices stop the overuse of resources and avoid artificially reducing the economic efficiency to increase the cost of obtaining resources. In addition, the income from franchise sales can also be used to provide other public goods. Such franchises, because it prevents the emergence of the tragedy of the commons and resource degradation, according to Sect. 3.2, share the legitimacy of individual property rights (Fig. 3.7).

Fig. 3.7
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Price of franchise

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The third form is that public authority limits the total use of resources through administrative means and assigns the use of resources to individuals and groups. Because of government restrictions, the cost of obtaining resources increases, but the distribution of costs is not fair. Increased costs consist of two parts: the first is the operating costs of government regulatory bodies. This cost is not shared by the users equally, because this method does not charge the users as directly as auctioning franchises. These costs of the government are paid by taxes, which are theoretically shared by all taxpayers, while taxpayers have different requirements for evaluations of the resource. The other cost is the extent of difficulty for users to obtain resources with the existence of government regulatory bodies. However, without market intervention, administrative allocation of resources can be unfair and leads to corruption such as bribes. Therefore, the difficulties of obtaining resources faced by users are different. As a result, this form is not a good choice, while the first two can be adopted.

Finally, public property rights are meaningful only when the government cannot establish individual property rights; for example, when exclusiveness costs are still too high even with the government’s efforts. If air is scarce, the government cannot separate the air that belongs to one person from the air that belongs to another even if it auctioned the right to sue air. Broadly speaking, public goods refer not only to measures of exerting limits, but also to measures of increasing supply, such as increasing green area in order to improve the environment. At this point, since the personal harvesting cost is very low, and the exclusiveness cost is very high, the government could not increase the personal harvesting cost or reduce the personal exclusiveness cost of the fresh air or the beautiful landscape. The only approach is to provide public goods to all. The public goods at this point may be called “pure” public goods. Nevertheless, in theory, this system is not efficient. Although, by definition, all people enjoy equal public goods, their utility evaluation is different. In some cases, they even have negative utility evaluation but still have to pay the same price (assuming the tax is the same to all people for single public goods). This form can be a considered a good choice only in extreme cases, namely when (1) excessive use may lead to resource degradation; (2) the personal harvesting cost is very low while the exclusiveness cost is very high (Fig. 3.8).

Fig. 3.8
figure 8

Demand and supply of public goods

Note: The tax rate equals to the intersection point of the cost curve and the demand curve; but the equilibrium supply is not determined by this point as the public goods are not exclusive. The equilibrium supply is at least equal to the demand at zero cost, that is, when the public demand curve is a vertical line. Obviously, the shadow part is the loss of the society, although it is perhaps inevitable

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3.5 Conclusion

Departing from the long-running economists’ argument about the pros and cons of individual property rights and public property rights, this discussion endeavors to discover what property rights system works better under different situations. Factors that make situations different include harvesting costs, exclusiveness costs, and whether the resource can be degraded and depleted due to human behavior. The different property rights systems considered are general individual property rights (at monopoly pricing and competitive pricing), special individual property rights, and public property right. This analysis moves the property rights system further away from ideological debates and places it on a technical footing.

The conclusion of this chapter is as follows:

  1. 1.

    If harvesting costs are higher than the scarcity of the resource, the resource is characterized as a non-scarce natural resource; if lower, the resource is characterized as a scarce public resource. In the former case, people can establish a general personal property system according to labor without possessing the resource personally; in the latter case, labor has no legal basis for possessing the resource. A special property rights system created by the government or public property rights system may be established depending on other factors.

  2. 2.

    If the harvesting costs plus exclusiveness costs are lower than the scarcity of the resource, this resource can still be a scarce public resource in nature. If the scarcity of the resource is higher than the harvesting costs but lower than the harvesting costs plus exclusiveness costs, this resource is a scarce public resource in the short term, and a non-scarcity natural resource in the long term, without being able to support general individual property rights based on labor. Only when the perceived value of the user is higher than the harvesting costs plus the exclusiveness costs can general individual property rights be established based on labor.

  3. 3.

    When the exclusiveness cost is so high that it exceeds the highest evaluation from the demand side, it is also inefficient to establish individual property rights. Eventually, improvements in technology and systems will likely reduce the exclusiveness costs and broaden the individual property rights.

  4. 4.

    For scarce public resources, if the exclusiveness costs are not too high, general individual property rights plus monopoly pricing are the most efficient system. If the supply of the resource is the absolute amount of the resource, and activities to obtain and use resources do not affect the regeneration capacity, then the congestion costs resulting from excessive acquisition and use of resources are solely borne by users, and general individual property rights plus competitive pricing, as well as no individual property rights, are both second-optimal choices.

  5. 5.

    But when activities to obtain and use resources affect their regeneration capacity, general individual property rights plus competitive pricing and no individual property rights are both inefficient. If the exclusiveness cost is low, it is best to set up the special individual property rights by public authorities through auctioning concessions on the premise of limited supply.

  6. 6.

    Furthermore, public property rights are wise to adopt if the exclusiveness cost is so high that even the public authority is unable to effectively reduce the cost, that is, providing public goods to all members of society through taxation.

It should be emphasized that this chapter proposes an idea rather than provides a detailed analysis of different forms of property rights; it presents an outline for study rather than drawing final conclusions. While this approach has academic interest, it may have an impact on property rights system of the real world.