THE DEFINITION OF ECONOMIC AND LEGAL RIGHTS

What are property rights? The term “property rights” carries two distinct meanings in the economic literature. One, primarily developed by Alchian (1965, 1987) and Cheung (1969), is essentially the ability to enjoy a piece of property. The other, much more prevalent and much older, is essentially what the state assigns to a person. I designate the first “economic (property) rights” and the second “legal (property) rights.” Economic rights are the end (that is, what people ultimately seek), whereas legal rights are the means to achieve the end. In this book I am concerned primarily with economic rights. Legal rights play a primarily supporting role – a very prominent one, however, for they are easier to observe than economic rights.

I define the economic property rights an individual has over a commodity (or an asset) to be the individual's ability, in expected terms, to consume the good (or the services of the asset) directly or to consume it indirectly through exchange. According to this definition, an individual has fewer rights over a commodity that is prone to theft or restrictions on its exchange.

The notion of rights is closely related to that of residual claimancy. The residual claimant to, say, an apartment house is its economic owner in that he is able to gain (here by exchange) from an increase in the value of the building, whereas he loses from a reduction in that value.