Property rights in a market system | Basic Economic Concepts | AP(R) Microeconomics   | Khan Academy
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Property rights in a market system | Basic Economic Concepts | AP(R) Microeconomics | Khan Academy


– [Instructor] In this
video we’re going to talk about an idea that’s crucial to the proper functioning of an economy under a market-based system. And that’s the idea of property rights, and it’s just the idea
that everyone agrees on who owns what and what can they do with that property? And for many of us who live in a part of the world with strong property rights, we take all of that for granted. We know who owns that house and what they have the
right to do with that house and if they were to sell that house, how that would occur, but in some parts of the world or in some parts of history, that wasn’t so clear. Someone might say they own the house, but then another person
might live in that house and they say well I’ve been
living here for 10 years, it’s my house now, deal with it. Or they might go hire some
thugs to say hey owner sell me the house for
less than the market value otherwise we’re going
to hurt you in some way and so in some ways they’re infringing on those property rights or the government might
just come in and say we’re gonna take that property
from you because we want it and in those situations property
rights would be weakened, and what we’re going to do is a little bit of a thought experiment to see why it’s so crucial for the proper functioning
of a market economy. And so let’s stick with the house analogy. So let’s say that we have some blue houses in our economy that look like that. Let’s say it’s owned by
this person right over here. Let’s say we have some pink houses that look like that. Let’s say it’s owned by
that person right over there and let’s say that we
have some orange houses that look something like that. They have some kind of arch on the top and let’s say it’s owned
by something like this, and let’s say these
people are all interested in selling their house. Maybe they’re downsizing
or they’re retiring or they’re moving someplace else. And so there’s a market
of potential buyers. So let me draw the buyers right over here and so there might be some people and if we have properly
functioning property rights, there might be some people who are really interested
in the blue house and so whoever is willing to pay the most for that
blue house will get it and so let’s say that this person is willing to pay I
would say one dollar sign for the house and so the ownership of the house will go to that person. Same thing for the pink houses. Maybe this person right over here is the person who really
likes the pink houses. They pay a different price,
maybe a little bit more. I’ll do two dollar
signs to represent that, and then they will get title to the house and maybe a ton of people
are really interested in these arched houses and maybe they bid for it
and the bidding keeps going higher and higher and higher and this person wins at the end and they have to pay up a lot for that orange house
that they get title for, and let’s just assume
that for whatever reason, that they’re all about
the same cost to bill. Well what would happen
in this market then? Well home builders or
even people in other types of houses will say wow, I can get a lot more for the orange house. The market is giving us a price signal. So this right over here,
this is a price signal. In fact, they’re all price signals, and when you take ’em together, you’re saying, hey, I get more for an orange house than a blue house and so maybe if they all
cost the same to build we’ll start producing more
of these orange houses. So builders will produce
more of these orange houses and maybe some people might
remodel their blue houses to have these orange arches on ’em, and so you could imagine that might happen from the price signal because it’s clear that that’s
where users preferences are. That’s where the demand is, but now let’s imagine a
slightly more dystopian world and this actually is what
much of human history was and even some significant
parts of the world today where there aren’t clear property rights. When this person says that
they have this house for sale, these people are like
is it really your house? And then this person comes
along and says no it’s my house and I have this proof that
my grandfather owned it and he never sold it to your grandfather and then this person
says I have a lot of guns and I don’t care what y’all say and what paperwork you have,
but I’m taking the house. Well how much would this
person be willing to pay this person right over
here in that circumstance? And so this person is much less likely to get these three dollar signs This person said hey, this is
kind of a risky investment. I don’t really know if I
take title from this person whether it’s still my house. So they’re not willing to
give three dollar signs, they’re only willing
to give one dollar sign or maybe no dollar signs. Maybe this house doesn’t even sell. Well then the price
signals have broken down, and so then in this
market people will tell me maybe we’ll build more of
the arched orange houses because that’s what the market demands and so you can quickly see that when property rights break down, the market system breaks down ’cause the market system
is all about people using price to figure out how much they’re willing to pay for things but that assumes that
when you get something that it’s really yours, that it’s not going to be disputed and the person you’re buying
from really has ownership and this break down would often be characterized as a market failure. Now you could say okay there’s other types of systems that we’ve talked
about in other videos. We talk about command economies and in the extreme in a command economy, you have no private ownership of things and so you might say
maybe that is a solution to this property rights problem, but command economies have significant problems of their own. In fact, very few of them or
really none of them in history have proven to really work because they have a
major incentive problem because if you’re just being told what to build by the government, you’re told how to build
it by the government, you’re told who that gets
it by the government. There’s very little incentive to try to innovate, to try to build more, to invest, or whatever else, and we talk about that in other videos. So I will let you go there. This is just an
introduction to think about this idea of property rights and ask your parents or talk
around or if you are a parent, look at the world of how
much infrastructure we have in a society like the United States or in much of the world today to enforce property rights.

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