Environmental Engineering Reference
In-Depth Information
focuses on property rights. The existence of property rights facilitates
cooperation, which signii cantly reduces the costs of transaction. In this
way, along with technology and other traditional constraints, institutional
constraints enter into the decision process of individuals (Aredo, 1999).
The collective action theory is the appropriate framework for understand-
ing institutional change (that is, the supply of institutions). The law and
economics branch of NIE studies the behaviour of rational individuals in
a setting where the rule of law imposes prices on various non-market deci-
sions (Posner, 1987). A closely related area is the economics of property
rights and contracts (Alchian, 1965).
Institutions are an integral part of an economic system. They help
to guide human behaviour and act as a key to economic performance.
Institutions are the rules of the game, both in game theory settings and
in the arena where individuals exchange goods and services. Institutions
serve a number of important economic functions like facilitating market
and non-market transactions, coordinating the formation of expecta-
tions, encouraging cooperation and reducing transaction costs. Apart
from being behavioural constraints, institutions also serve as a kind of
knowledge in a world of imperfect information and imperfectly rational
individuals (Olsson, 1999). In the context of common pool resource (CPR)
management,
2
institutions can be more specii cally dei ned as a set of
accepted social norms and rules for making decisions about resource use:
these dei ne who controls the resource, how conl icts are resolved and how
the resource is managed and exploited (Richards, 1997). Institutions are
often subdivided into formal and informal institutions. Formal institu-
tions include laws, contracts, political systems, organization and markets;
informal institutions are informal rules of conduct like norms, traditions,
ethics, value systems, religion and ideologies. The former include informal
cooperation and exchange, and moral or spiritual controls, often based on
traditional heads, organized user groups, village committees and district
councils. CPRs usually depend on a mix of both types of institutions. An
institutional arrangement
3
is basically an arrangement between two dif er-
ent economic units that govern and shape the way in which each economic
agent can negotiate and cooperate (Kherallah and Kirsten, 2001).
The role of property rights in managing local public goods
4
is examined
in the NIE literature. Property rights are social institutions that dei ne or
delimit the range of privileges granted to individuals or groups to specii c
assets, such as parcels of land, water or forest (Libecap, 1989). According
to Coase (1960), externalities that arise from the use of public goods can
be internalized through bargaining and negotiation if property rights are
well established and transaction costs are zero. That is, voluntary nego-
tiation will lead to a fully ei cient outcome providing that (1) rights are
