The buyer of an apple, a CD, a television set, or an automobile generally takes the item home. The buyer of a steamship or an office building, though, may never touch it. When exchange occurs, it’s really th the item that change hands.
(1) the right to exclusive use of the property (that is, the owner has sole possession, control, and use of the property-including the right to exclude others);
(2) legal protection against invasion from other individuals who would seek to use or abuse the property without the owner’s permission; and
(3) the right to transfer, sell, exchange, or mortgage the property.
Private owners can do anything they want with their property as long as they do not use it in a manner that invades or infringes on the rights of another. For example, I cannot throw the hammer that I own through the television set that you own. If I did, I would be violating your property right to your television. The same is true if I operate a factory spewing out pollution harming you or your land.5 Because an owner has the right to control the use of property, the owner also must accept responsibility for the outcomes of that control.
In contrast to private ownership, common-property ownership occurs when multiple people simultaneously have or claim ownership rights to a good or resource. None of the common owners can prevent the others from using or damaging the property. Most beaches, lakes, and parks are examples of commonly owned property. The distinction between private- and common-property ownership is important because common ownership does not create the same powerful incentives as private ownership. Economists are fond of saying that when everybody owns something, nobody owns it.
Clearly defined and enforced private-property rights are a key to economic proe Ores because of the powerful incentive effects that follow from private ownership of goods and resources.
Middlemen provide buyers and sellers information at a lower cost and arrange trades between them. Many people think middlemen just add to the buyer’s expense without performing a useful function. However, because of transaction costs, without middlemen, many trades would never happen (nor would the gains from them be realized). An auto dealer, for example, is a middleman. An auto dealer helps both the manufacturer and the buyer. The dealer helps buyers by maintaining an inventory of vehicles for them to choose from. Knowledgeable salespeople hired by the dealer help car shoppers quickly learn about the vehicles they’re interested in and the pros and cons of each. Car buyers also like to know that a local dealer will honor the manufacturer’s warranty and provide parts and service for the car. The dealer helps manufacturers by handling tasks like these so they can concentrate on designing and making better cars.
Grocers are also middlemen. Each of us could deal with farmers directly to buy our food-probably at a lower monetary cost. But that would have a high opportunity cost. Finding and dealing with different farmers for every product we wanted to buy would take a lot of time. Alternatively, we could form consumer cooperatives, banding together to eliminate the middleman, using our own warehouses and our own volunteer labor to order, receive, display, distribute, and collect payment for the food. In fact, some cooperatives like this do exist. But most people prefer instead to pay a grocer to provide all of the goods they want rather than trying to trade with different farmers.
Stockbrokers, realtors, publishers, and merchants of all sorts are other kinds of middlemen. For a fee, they reduce transaction costs for both buyers and sellers. By making exchanges cheaper and more convenient, middlemen cause more efficient trades to happen. In so doing, they themselves create value.
How many times have you been sitting home late at night, hungry, wishing you had a meal from your favorite fast-food restaurant? You would gladly pay the $4 price for the value meal you have in mind, but you feel it is just not worth the time and effort to get dressed and make that drive. The costs of the time, effort, and other resources necessary to search out, negotiate, and conclude an exchange are called transaction costs. High transaction costs can be a barrier to potentially productive exchange.
Because of transaction costs, we should not expect all potentially valuable trades to take place, any more than we expect all useful knowledge to be learned, all safety measures to be taken, or all potential “A” grades to be earned. Frequent fliers know that if they never miss a flight, they are probably spending too much time waiting in airports. Similarly, the seller of a car, a house, or a ballet ticket knows that finding the one person in the world willing to pay the most money for the good is not worth the enormous effort it would take to find him or her. Information is costly. That is one reason that perfection in exchange, as in most things we do, is seldom worth achieving.
The Internet has significantly lowered transaction costs. The auction Web site eBay enables sellers to reach millions of potential buyers with little effort and few costs. Buyers can easily search eBay for items they want to buy, even if the items are located halfway around the world. Other Web sites, such as MySimon and Pricescan, scour online shopping sites for the lowest prices so buyers don’t have to. Consumers can also readily find detailed information about products on any number of sites. Amazon.com posts prices, product information provided by manufacturers, and reviews from other buyers. By reducing transaction costs, the Internet creates value and wealth. It expands the number of trades that are made, and makes it faster and easier to make them.
By channeling goods and resources to those who value them most, trade creates value and increases the wealth created by a society’s resources. Because preferences differ among individuals, the value of an item can vary greatly from one person to another. Therefore, trade can create value by moving goods from those who value them less to those who value them more. The simple exchange between Janet and Brad also illustrates this point. Imagine for a moment that Brad and Janet had never met and instead were both eating their salads alone. Without the ability to engage in this exchange, both would have eaten their salads but not had as much enjoyment from them. When goods are moved to individuals who value them more, the total value created by a society’s limited resources is increased. The same two salads create more value when the trade occurs than when it doesn’t. It is easy to think of material things as wealth, but material things are not wealth until they are in the hands of someone who values them. A highly technical book on electronics that is of no value to an art collector may be worth several hundred dollars to an engineer. Similarly, a painting that is unappreciated by an engineer may be of great value to an art collector. Therefore, a voluntary exchange that moves the electronics book to the engineer and the painting to the art collector will increase the value of both goods. By channeling goods and resources toward those who value them most, trade creates wealth for both the trading partners and for the nation.