Question

What are better-defined property rights and what incentive do they provide to account for external costs?

Short answer

• Better-defined property rights the legal rights of ownership on which others are not allowed to infringe without paying compensation.
• It gives a firm an incentive to reduce the cost of pollution by compensating the other firm or an individual whose property is polluted.

Step-by-step solution

Step 1. Background

To address the short-comings of command-and-control regulations, a different approach is used i.e. market-oriented environmental policies and better-defined property right is one of the three tools come under market-oriented environmental policies.

Step 1. Definition

Better-defined property rights are the legal rights of ownership on which others are not allowed to infringe without paying compensation.

It does not matter how property rights are distributed.

Step 3. Example

If a firm uses someone's land to dump its garbage, the owner of the land has legal rights to charge an amount for compensation.

Step 4. Incentives gives by better-defined property rights

Better-defined property rights give a firm an incentive to reduce the cost of pollution by compensating the other firm or an individual whose property is polluted.