In this chapter students will be able to: Calculate the amount financed, finance charge, and deferred payment, calculate the estimated APR by table lookup, calculate the monthly payment by formula and by table lookup, calculate the finance charges on revolving charge credit card accounts.
Chapter 14 Challenge To Market Effectiveness 4: Inadequate Property Rights McGrawưHill/Irwin Copyrightâ2009byTheMcGrawưHillCompanies,Inc.AllRightsReserved Learning Objectives ã ã ã ã ã ã What are property rights? How property rights create wealth? What is the tragedy of the commons? What are different categories of goods? What is a public good? Why does the market fail to produce public goods? • What is intellectual property? • How real estate property rights help people? 14-2 Property Rights • To have property rights in a good means one can use the good oneself, sell it to others or prevent others from using the good • A prime reason for widespread devastating poverty is the lack of adequate property rights • When property rights aren’t secure, markets have difficulty creating wealth 14-3 Pain Before Pleasure • Businesspeople must invest their time and resources before earning a profit • Without property rights, the initial pain of investment often leads to disappointment rather than to pleasurable profits • People without property rights often have no incentive to suffer the initial pain that investment requires • For example, because it lacked secure property rights, few people invested in Russia 14-4 Securing Property Rights • Creating secure property rights is difficult • For property rights to be secure, they must be respected at many levels of society • The central as well as local governments must refrain from arbitrary confiscation • In addition, secure property rights require honest courts that can adjudicate disputes among businesspeople and honest police who prevent criminal gangs from seizing property • Secure property rights also require families to respect the individually owned property of their members 14-5 Property Rights • For property rights to create wealth, they must belong to individuals, not groups • The wealth-creating superiority of individual over collective property rights was well shown by Soviet agriculture • Peasants had to farm the communal land without the right to keep what was grown on it Consequently, peasants often did a shoddy job of farming the collectively owned land • The small, privately owned plots, which accounted for only 1% of the farm land in the Soviet Union, produced one-third of all the food grown in the country 14-6 Dr Seuss’ The Lorax • The Once-ler discovers that he could use the soft tuft of a Truffula tree to make Thneeds • To increase his profit, the Once-ler soon cuts down more and more Truffula trees • Without property rights, the Once-ler cares only about the short term, because he knows that the Truffula trees would never survive in the long run • Property rights would have caused the Once-ler to take a long-term view of the Truffula trees He would have managed his Truffula forest so that it would continually renew itself 14-7 Tragedy of the Commons • A resource is rival if one person’s use of it reduces the amount left for other people to consume • A resource is excludable if people can be prevented, or excluded, from using it • A non-excludable resource will continue to be used as long as some people benefit from it But, if the resource is rival, then each person’s use harms other people • So, resources that are rival but non-excludable will (tragically) tend to be used until they are depleted or destroyed • A tragedy of the commons arises when a resource is rival but non-excludable 14-8 Tragedy of the Commons The Buffalo Tragedy: • In 19th century, any American had the right to kill buffalo • Consequently, American buffaloes were almost hunted to extinction Lake Commons: • Fish are a rival resource If anyone has the right to fish in the lake, people will continue to fish this lake until no fish survive to spawn new fish 14-9 Tragedy of the Commons • When a common resource is owned by no one, each user can benefit from using the resource • But, because the resource is rival, each person’s use of the resource creates negative externalities on everyone else • People tend to overuse goods that have negative externalities • The tragedy of the commons problem arises because absent some corrective measure, common resources are frequently used until depletion • Property rights make a resource excludable and solve the tragedy of the commons problem 14-10 Public Good • A public good is any product or service that is non-rival and non-excludable • Because it’s non-rival, one person’s use of a public good doesn’t harm other people • Because it’s non-excludable, anyone can benefit from a public good regardless of whether they have contributed to creating it • Consequently, people have an incentive to freeride off of others’ expenditures on public goods 14-11 Public Good • Because public goods are non-excludable, their creators can’t acquire property rights in them • The free market does not induce self-interested people to engage in producing public goods because they would receive only a tiny fraction of the benefits of their efforts • Adam Smith’s invisible hand of the marketplace does not push people to take socially beneficial actions • Through compulsory taxes, the government can prevent people from free riding off others and provide public goods 14-12 Charlie and the Chocolate Factory • Using the information gathered by their spies, other chocolate firms started selling the exact same products that Willy Wonka produces • Because of the widespread theft of his chocolate innovations, Willy Wonka has to shut down his factory • Insufficient property rights cause Wonka to stop making candy since he cannot recover his innovation costs 14-13 Intellectual Property • Intellectual property is information rather than physical goods, e.g the formula for making Everlasting Gobstoppers, the code behind a software program, the composition of notes making up a song • To have secure property rights in intellectual property means that no one can use the proprietary information without the innovator’s permission • Intellectual property can sometimes be defended without governmental help French chefs protect their intellectual property by ostracizing those who steal 14-14 Internet Piracy • Internet piracy has eroded intellectual property rights in music and movies • The Internet has made music and movies far less excludable • Such theft of property poses a significant threat to the for-profit production of movies and music • Although Internet piracy is illegal in most countries, the laws are not seriously enforced 14-15 Solutions to the Internet Piracy Problem • • • • • • Increase the Moral Cost of Theft: Use of advertising to convince people that theft of intellectual property is wrong Action Figures/Concerts: Creators of intellectual property could still profit even if everyone freely took their property by selling products based on their intellectual property Advertising: Movies, music, and books could incorporate commercials into their plots Tips: Intellectual property creators could ask for tips from consumers Self-Enforcement: Intellectual property holders could use virtual weapons to protect their stuff Not-For-Profit Production: Even with rampant intellectual property theft, amateurs will still produce movies, music, and books for pleasure and fame 14-16 Real Estate Property Rights • The ownership of every home, building, and piece of land in most rich countries is diligently recorded by the government • Banks readily make collateral-backed loans because of such careful records • Collateralized property loans allow many people in rich countries to buy homes or start small businesses • Unfortunately, most of the real estate owned by poor people in poor nations is not publicly recorded They are consequently denied the benefits of collateral-backed loans that benefit citizens of rich nations 14-17 Property in Poor Countries • Most of the property possessed by poor people in poor countries is only informally owned • Because no one officially owns the land, the property legally belongs to the government • According to Hernando De Soto, informally owned property is “dead capital.” Dead capital refers to assets that can’t be used to create new wealth • Banks are extremely reluctant to give loans to people with dead capital as collateral • Similarly, lack of individual property rights, which creates dead capital, is a prime reason for Native American poverty 14-18 The Story of Srey Neth • • • • • Srey Neth was a Cambodian teenage prostitute/sex-slave New York Times columnist, Nicholas Kristof, purchased her freedom for $150 With Kristof’s help, Srey Neth started a small shop but it failed because she lacked property rights She could not stop her family from taking the goods from her shop Using money donated by some New York Times readers, Srey Neth attended school to become a beautician Srey Neth’s family likely possessed only dead capital that couldn’t be used as collateral for a loan So without charitable assistance, Srey Neth would not have been able to pay for her education Many people in poor countries have the skills to run small businesses, but their lack of property rights and dead capital often makes this impossible 14-19 Where Property Rights Are Not Needed • The free software movement purposefully rejects property rights to deliberately create public goods, e.g the computer operating system Linux and the online encyclopedia Wikipedia • Both of these free software products are built by volunteers and are freely and legally accessible to everyone • Since Wikipedia and Linux deliberately forsake property rights, their tremendous success poses a challenge to the worldview of those who believe in the importance of property rights for wealth creation 14-20 Do You Know? Why does collective ownership discourage wealth creation? Collective ownership of resources does not provide individual property rights People without property rights often have no incentive to suffer the initial pain that investment requires and hence to create wealth What is the “tragedy of the commons”? The tragedy of the commons is a problem that arises when common resources are frequently used until depletion 14-21 Do You Know? Why doesn’t Adam Smith’s invisible hand cause selfinterested people to provide public goods? A public good is any product or service that is non-rival and non-excludable Adam Smith’s invisible hand fails to push self-interested people to engage in producing public goods because they would receive only a tiny fraction of the benefits of their efforts What is the problem with dead capital? Dead capital refers to property that is informally owned without any official records These assets can not be used to create new wealth as banks are extremely reluctant to give loans to people with dead capital as collateral 14-22 Summary • • • • • • • To have property rights in a good means one can use the good oneself, sell it to others or prevent others from using the good Without secure property rights people have no incentives to invest and create wealth The tragedy of the commons problem arises because rival but nonexcludable resources are frequently used until depletion A resource is rival if one person’s use of it reduces the amount left for other people to consume A resource is excludable if people can be prevented, or excluded, from using it A public good is any product or service that is non-rival and nonexcludable Market fails to produce public goods because people have an incentive to free-ride off of others’ expenditures on public goods 14-23 Summary • To have secure property rights in intellectual property means that no one can use the proprietary information without the innovator’s permission • Theft of intellectual property poses a significant threat to the for-profit production of movies and music • Because of lack of real estate property rights, many people in poor nations are denied the benefits of collateral-backed loans that so benefit citizens of rich nations • The free software movement that purposefully rejects property rights to deliberately create public goods has been tremendously successful 14-24 Coming Up What is incomplete information? 14-25 ... grown in the country 1 4- 6 Dr Seuss’ The Lorax • The Once-ler discovers that he could use the soft tuft of a Truffula tree to make Thneeds • To increase his profit, the Once-ler soon cuts down... rival but non-excludable will (tragically) tend to be used until they are depleted or destroyed • A tragedy of the commons arises when a resource is rival but non-excludable 1 4- 8 Tragedy of the Commons... tragedy of the commons problem 1 4- 10 Public Good • A public good is any product or service that is non-rival and non-excludable • Because it’s non-rival, one person’s use of a public good doesn’t harm