PROPERTY RIGHTS AND EXTERNALITIES: THE UNEASY CASE OF KNOWLEDGE

Abstract: Drawing from Coase’s methodological lesson, this article discusses the specific
case of knowledge, which was for a long time chiefly governed by exchange mechanisms lying
outside the market, and has only recently been brought into the market. Its recent, heavy
“colonization” by the property paradigm has progressively elicited criticism from commentators
who, for various reasons, believe that the market can play only a limited role in pursuing
efficiency in the knowledge domain.

The article agrees with the enounced thesis and tries to provide an explanation of it that relates to the fact that in specific circumstances property-rights can produce distinct market failures that affect the social cost and can consequently prevent attainment of social welfare.

In particular, the arguments set forth here concern three distinct externalities that arise when
enforcing a property rights system over knowledge. First, the existence of a property right may
itself alter individual preferences and social norms, thus causing specific changes in individuals’
behaviour. Second, the idiosyncratic nature of knowledge, as a collective and inherently
indivisible entity, means that its full propertization can be expected to produce significant harm.

Third, property rights can cause endogenous drifts in the market structure arising from the
exclusive power granted to the right holder: though generally intended as a necessary mechanism
for extracting a price from the consumer, in the knowledge domain property rights can become a
device for extracting rents from the market.

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