Property Rights and the Impact on Resource Allocation and Welfare: A Diagrammatic Exposition.

This article seeks to demonstrate clearly that while the exact assignment of property rights makes no difference to the achievement of allocative efficiency, it does affect the welfare of the parties involved. Understanding the welfare changes highlights an important policy insight to students of neoclassical economics who are taught that there is a trade-off between efficiency and welfare (equity). The article also shows that since the efficiency goal is unaffected by who is assigned the property rights, the assignment exercise can be used to alter welfare in some "desired" direction without compromising efficiency-an exciting policy opportunity that comes only rarely in economics! Finally, the article discusses a case example where a solution to an externality was found, despite the absence of Coase's conditions of clear property rights and low transaction costs, and Pigou's idea of public sector intervention. The case study discussed in this article shows how grassroots movements can fill the vacuum created by an impotent public sector in addressing a situation of extensive negative externality.