Creation of property rights in planning by contract and edict: Beyond “Coasian bargaining” in private planning

Abstract

This article advances the proposition that the creation of property rights, whether by contract-upon-negotiation or edict, is far more significant than what has been described as “Coasian bargaining” in effecting sustainable development. By “creation” we intend the neo-institutional economist’s sense of establishing a degree of exclusive property rights for common property or devising new contractual arrangements in which private property rights are entrenched. This is sometimes mistakenly confused with the assignment of property rights. “Sustainable development” is understood as the transformation of negative into positive externalities or a state of the tragedy of the commons into a vibrant resource nourishing industry. Two real-world cases involving government planning are used to illustrate this proposition.

Keywords

Coasian bargaining creation of property rights open access resource planning by contract planning by edict

Well-defined property rights and rule of law are all that is necessary to protect the environment from “tragedy of the commons” outcomes … government regulation to achieve environmental objectives typically does worse than private property rights and free markets. To begin with, regulators typically will not have access to the information generated by and available to participants in free markets. And regulators will have little incentive to obtain that information by other means. Second, Coasian bargaining will generally ensure that a property right will flow to the highest-value user,¹ but such exchange is often prohibited in a regulatory setting …

(Wynne, 2004: 14, authors’ italics).

Research background

Granted that state officials suffer from a Hayekian informational problem in spatial matters (Andersson, 2005, 2012; Andersson and Moroni, 2014), can the state’s only positive planning role be to do nothing and allow private contracting based on existing property rights?

Traditionally, planning by the state, influenced by dichotomous plan-market thinking, is treated as the natural enemy of private property rights as planning is seen as necessarily being one by order or edict.²

There is generally less interest in the positive contribution of the state than in its failure in planning by edict, although the creation of property rights by judges, as in the case of the application of the Ninth Amendment of the US Constitution,³ is well known. There is, instead, greater faith in the market while, however, neglecting its transaction cost problems. That is something that Coase pointed out that has been glossed over by his enemies and even his friends. But planning theorists informed by Coasian economics have advanced the view that besides infringing on the property rights of individuals, the state can actually “assign” or “reassign” property rights by edict or contract, depending on situation, and therefore promote, rather than just restrict, trade and development (Webster and Lai, 2003).

The assignment/reassignment of property rights and the creation or establishment of new property rights are, however, not necessarily the same concept. The assignment/reassignment aspect refers to both “forward planning” (also known as “development planning”) and “development control.” That is, it relates to regulative planning and its enabling/permitting/prohibiting activities and land-uses, which materially affect property rights and values. “Creation” goes beyond this and can be understood to refer to (the generation of socially created) development potential and state-conferred and assigned development rights.

The meaning of “property rights” needs clarification before any discussion of their creation or (re)assignments. In the neo-institutional economic literature heavily influenced by Coase (1960), the traditional expression, “property rights creation,” is a term that can mean one of two things. It can mean either the establishment of private property rights over previously common property, in which there is a phenomenon of rent dissipation (Anderson and Grewell, 1999; Demsetz, 1967; Haddad, 2003; Johnson, 1972). Or it can mean the establishment of new rules under a prevailing private property system (Ekbäck’s, 2012; Maguire and Phillips, 2011; Pirrong, 1995). Whether an economist refers to the first or second case depends on context. Anderson and Hill (1975) sought to derive a refutable model that generalized both. However, when they argued “that the creation of property rights begins with the heterogeneous entrepreneurial perception of new and different attributes or uses of a resource” (Anderson and Hill, 2002: S492), they referred to the latter case. In either case, as transaction costs are involved, “changes require that the value of property rights creation be sufficient to overcome the transactions costs incurred” (Smith and Wilen, 2002: 37).

This article follows this understanding⁴ and explores how in planning, taken to mean purposeful action to effect the spatial environment in its wide sense, changes in property rights as such operate.

In the planning literature, Webster and Wu (2001) proposed further inquiry into the nature of “Coasian bargaining in urban development.” This article picks up the challenge by reviewing the meaning of “Coasian bargaining” in relation to planning by contract.

It also attempts to consolidate the theoretical arguments over the potential role of the state in Coasian, creation-of-property-rights planning by contract and edict, and support them with real-world cases in relation to, but beyond the mere facilitation of, the so-called Coasian bargaining. The consolidation is in terms of two modes of planning that are conducive to the property rights creation discussed above. The first mode of planning is a contractual process that can address negative externalities. The second mode can transform a scenario of rent dissipation into one of innovative production. The consolidation necessitates a recollection of the concepts of Coase and of their applications.

The limitations of “Coasian bargaining”

Coasian economics is a significant improvement over neo-classical economics in two respects. The latter takes for granted the absence of transaction costs (i.e. costs other than those captured by a production function) and the existence of a given set of preferences, laws, and the best production technology.

By contrast, Coasian economics, by stressing property rights, offers a framework for exploring the real-world situations of positive transaction costs and rent dissipation.

“Property rights provide the structure that encourages development, innovation, conservation, and discovery of new resources” (Anderson and Huggins, 2004: 58). They also offer insights into the conditions for encouraging/enabling innovation. Both of these features are predicated on Coase’s insight that institutions matter, as explained for planning by Webster and Lai (2003) and Alexander (2001, 2005, 2006, 2007, 2014). This is sometimes also articulated as one of the versions of the Coase Theorem. The corollary of the Coase Theorem holds that the way in which rights are assigned, in the presence of positive transaction costs, affects resource allocation (Lai and Hung, 2008). By extension, this has a bearing on innovation in the sense of shifting/expanding a production function because it calls for some enabling rights or entitlements (Yu et al., 2000).

Unfortunately, through no fault of Coase, but rather of his followers (Coasians) and foes (Pigovians) alike, one understanding of Coase’s ideas has narrowly focused on a pure exchange process called “Coasian bargaining” that shapes resource allocation but without innovation in production. This process is a private contracting process under given sets of property rights (notably the common law prevailing) in which parties may be modeled as bargaining and trading along the contract curve to attain Paretian optimality within an Edgeworth box of a given dimension. Although the admission of this process of freedom of contract as an alternative to state orders, edicts, or customs for deciding resource use is superior to Pigovian welfare economics, Coasian economics actually retain the assumptions of neo-classical economics of fixed preferences, law, and technology. In fact, the separation between exchange (and bargaining as a contracting mechanism) and production (involving Schumpeterian innovation as a process) has taxed the mind of neo-institutional economists. One early attempt to apply contracting to innovations was made by Yu (1981). This work furthers the work of Yu et al. (2000).

This article holds that the creation of property rights, whether by contract or edict in planning, is the true spirit of Coasian economics applied to public policies with innovation in mind. Such creation should be recognized as being compatible with, but distinct from, the empowerment of the public and/or political bargaining stressed in the communicative theory of planning (Fainstein, 2000; Graham and Healey, 1999; Healey, 1992; Lane, 2001) and is far more important than pure market bargaining. Even Coasian bargaining in its real sense (Webster, 1998a, 1998b; Webster and Lai, 2003), as defined below, whether or not the state is a party, sometimes needs to be created by edict, in short, what Anderson and Grewell (1999) described as “top-down property rights creation,” as opposed to “bottom-up accounts of private property formation” (Wyman, 2005). New rights created by contract or by edict are conducive to, if not aimed at, the emergence of new properties.

Innovation here is “Schumpeterian” in the sense that it involves an upward shift in a production function or the introduction of a new production function. When this function becomes a fuzzy area instead of a neo-classical linear equation, sustainable development is possible due to innovation so defined⁵ (Lai and Lorne, 2014; Yu et al., 2000).

Two real-world cases of planning for land and maritime resources are presented to demonstrate this point. But prior to that, some clarification of the concept “Coasian bargaining” in connection with planning by contract is essential.

Coasian bargaining

The term, “Coasian bargaining,” like the famous “Coase Theorem,” is not jargon Coase coined. It can be traced back to Page (1973). It is loosely used by many economists⁶ and is often applied to describe scenarios clearly ruled out by Coase.

It must be noted that the wheat farm–cattle farm example in Coase (1960), from which the official version of the Coase Theorem was derived by Stigler, involving two landowners, occurs expressly in the absence of transaction costs and clearly delineated property rights in the sense of clearly delineated land boundaries. Externalities, treated as valuable as legal rights for suing in trespass, are internalized by leasing land to one’s neighbor in a direction depending on the relative product prices of goods produced on land, which maximizes total joint output. The leasing of land, described by Coase as a “rearrangement of legal rights through the market” (Coase, 1960: 15), can be seen as an exchange of legal rights to address externalities without the need for the court or government planner. No bargaining is involved, as the assumption of zero transaction costs of neo-classical economics is retained, precisely in order to show the weakness of Pigovian analysis as a form of neo-classical economics. Coase actually says indirectly that neo-classical economics, given its assumptions, has no place for externalities. Therefore, Pigou was wrong.

Note that in either Coase’s example or in its theoretical generalization as the “Coase Theorem,”⁷ any contractual exchange for internalization of an externality must be without bargaining.⁸ That is because given the assumption of zero transaction costs, bargaining is unnecessary. In other words, “Coasian bargaining” can only occur in a contractual process under positive transaction costs, as under what has been called the “corollary of the Coase Theorem.”

Critics of Coase labor under the false impression that he meant to say that freedom of contract (in the sense of an exchange of legal rights) is a panacea for externalities in the presence of high transaction costs. In Coase’s view, in fact, the presence of externalities AND high transaction costs prohibits trading. In this way, Coase’s idea has been distorted and “trading of rights in the absence of transaction costs” becomes misrepresented as “bargaining in the presence of huge transaction costs.” This may be called “corrupted Coasian bargaining,” as such “bargaining” is a negative term that abuses Coasian thinking as one that supports “bribing” (Farber, 1985; Page, 1973). Similarly, in much of the game theory bargaining literature in economics, the Nash equilibrium has always been recognized as an outcome that differs from a Coasian equilibrium—unless “side contracts” can be made outside the realm of game-playing.

Coase’s trespassing example involves two explicit (and two implicit) parties contracting, as in the case of a bilateral monopoly. Coase (1960) clearly expressed the view that when a large number of parties are involved, as in nuisance, zoning regulations may be a superior solution to bargaining (Coase, 1960: 17; Hovenkamp, 2001; Lai, 1997, 2002). In politics, democratic decision-making can be more efficient than bargaining (Mueller, 1996). This rules out the claim by critics that Coase “fails to deal with large numbers.” He taught otherwise. Nor is it true that the “Coase theorem fails” when parties go to court rather than bargain, as asserted by Robson and Skaperdas (2008). Whether or not parties resort to bargaining, the law or officialdom is a matter of transaction cost, as the corollary of the Coase Theorem holds.

A correct description of Coasian bargaining (“true Coasian bargaining” or “Coasian bargaining properly understood”) sees it as a phenomenon of exchange or transaction under positive, but not prohibitively high, transaction costs that internalize externalities by contract upon negotiation rather than just by mere price, quantity, or plea bargaining or by litigation. It is not simply cooperation or compensation, as suggested by Sagoff (2011). It may succeed or fail even if both parties act in good faith with a Paretian-efficient outcome in mind (i.e. a lose–lose outcome is not intended). The condition is that no new rights are exchanged or created. Only existing or known forms of property (or rights to them) are transacted as variable inputs, according to an existing set of rights, legal and social, as parameters. Above all, the Coasian vision is limited to the internalization of externalities and does not consider transforming negative externalities into positive ones as a means to attain sustainable development in the sense of conversion of negative externalities into positive ones, as defined by Yu et al. (2000) and followed up on by Lai and Yu (2004), Lai and Lorne (2006), and Lai et al. (2006).

Understandably, sustainable development has been outside the mainstream economic analysis of neo-classical or even conventional neo-institutional traditions. The contribution of Coasian bargaining to the context of attaining economic efficiency in the traditional sense can be quite limited.

“Coasian bargaining” in planning

Applied to interventionist planning, “corrupt Coasian bargaining” is often used as an excuse to support land taking for profit-seeking, state-led, urban renewal projects. It has been argued that the prohibitively high transaction costs due to holding out⁹ by small proprietors frustrate or unduly delay redevelopment for the public good (removal of negative externalities), and therefore, the power of the state to take or resume land is essential. Often, some rights are created by edict (i.e. not by consent) to enable a government-controlled corporation to impose a scheme in which the existing proprietor may not even be given the option to participate. This corresponds well with the rent-seeking economic model of Tullock (Fischel, 1985; Webster and Lai, 2003) and goes against the view of Buchanan (Lai, 2014c).

Private planning, as in that undertaken by entrepreneurs operating contractually under the freedom of contract, was a common urban phenomenon during the 19th century (Andersson and Moroni, 2014). It is conducive to Coasian bargaining and property rights creation. Although typically performed by private enterprises, the state is inevitably involved to uphold the rule of law and sometimes engage in such planning by franchising or granting leasehold titles to private individuals or companies (Lai, 1995, 1997, 1998, 2014a).

In private planning, “true Coasian bargaining” occurs when, for instance, a private or public developer negotiates and convinces the owners of an old and dilapidated existing property, which generates lots of negative externalities like an unsightly townscape, to sell their land at an agreed-upon date and at an agreed-upon price. No duress or threat is used and the whole process is based on mutual respect and agreement. Abildtrup et al. (2012) described a process of bargaining involving duress (threat of expropriation) as a form of “impure Coasian bargaining” (Clinch et al., 2008). To assemble land by contract upon negotiation WITHOUT state assistance is, in fact, the developer’s proper social function. Often the outcome is successful, although the time taken may be long, and thus, it is always tempting for business interests to seek help from the state to expropriate any private property they target. The provision of rehousing and/or housing in the existing property for life for the old owners is a typical quid pro quo consideration for obtaining titles to their land.

Another example of private planning by contract upon true Coasian bargaining is an agreement between the incorporated owners of two adjoining properties to carry out coordinated renovation to internalize negative externalities due to repairs and to achieve a better joint effect.

A third example is negotiations between a transport authority and the public bus industry to use environmentally more friendly diesel engines in consideration for exemption from diesel tax (Lai and Lorne, 2012).

A fourth example is an international agreement to share trans-boundary water resources, as in the case of the 1944 Treaty between the United States of America and Mexico (Baker and Willis, 2006).

A fifth example is the “Hui” (group) arrangement to constrain rent dissipation in lobster resources by mutual agreement on how to operate within quotas, pinpointed as a result of “Coasian bargaining” by Townsend et al. (2003).

All these examples involve exercising existing rights by trading them and do not involve new rights, which can be created by negotiation and by state order, as explained in the section below.

Creation of property rights by contract upon negotiation and by edict

New property rights can be created in two distinct ways. One way is contractual upon negotiation or bargaining. This may happen by true Coasian bargaining leading to a private agreement, in which the state can be a party, that results in a new set of rights to subdue negative externalities. The other way is creation of rights by edict. This often happens when the state assigns new rights to avert a situation of rent dissipation due to open access to a resource, although this is not to say that the state always does this, as the British government’s choice not to privatize oyster culture in Case Study 2 reveals.

To Lorne and Bordian (2009), for most creations of “new property” to succeed, what is needed is a change in the mindset of stakeholders from a zero sum (i.e. win–lose), antagonistic, or strategic attitude to a win–win, cooperative one or from a situation of rent dissipation by unrestrained competition into an orderly nurturing of resources.

In some ways, creation of property rights also involves changing “the rules of the game” if it is to be analyzed in a game-theoretic economic framework. The literature on this subject is voluminous, starting with Thomas Schelling’s (1960) Strategy of Conflicts. Many institutionalists have favored this as the tool for examining the formation of rights and institutions.

These suggestions are beyond the scope of this article. Suffice it to say that creation of property rights in planning suggests a new angle to the problem in that the modeling of rights is not limited to inventing or designing the rules of the game. It also takes into account capital creation incorporating the constitutive elements of sustainable development—economic, environmental, and social. Rights are associated with tradable capital in various degrees. Capital created in the realm of business and the economy is usually tradable if the economy in which it operates is a market economy. But even if an economy is not market-based, capital created is also tradable to a certain degree.

Case studies

Both cases selected began as a crisis, imaginary or real, confronting the state. The first case selected involves an initial situation of a negative externality and the second rent dissipation. The methodology of the study is one of documentary analysis with particular reference to terms in contracts or policies, where available. Their success or otherwise is evaluated by references to examples in other jurisdictions.

The first case involved some new rights created in the form of a land contract by private negotiation with the state as a party. In this case, negative externalities in the form of a political crisis—protests by the Chinese Government, the de facto landlord of Hong Kong at the time—were transformed into positive ones. This Hong Kong case is a good example of “planning by contract.” It is not a “special case” in the sense that it is unique, but special as a “type” because the Singaporean leasehold model and the Chinese Land Use rights model (based on auction and private negotiation) are similar (Lai, 1995, 1997, 1998, 2010).

The second case, the French experience relating to oyster culture, involves the state assigning exclusive rights to some parties over what had been an originally open access resource. As a result, rent dissipation of resources was replaced by abundant quantitative and qualitative growth in output. In consequence, the room for trade expansion or industrial development was enlarged and all pointed to sustainability.

In both cases, the weakness of the state in information discovery was not an issue, as it was not attempting “to do business,” but rather creating rights under which investment was promoted.

Case 1: Discovery Bay development

The genesis of Discovery Bay is an interesting story¹⁰ of the creation of property rights through an initial Coasian negotiation between two parties with an international political background. It all began during the 1970s when an overseas Chinese investor purchased a number of agricultural lots under leasehold tenure near Silvermine Bay (Mui Wo) on Lantau Island and then only connected to the rest of Hong Kong by sea transport. His purpose was to gather adherents of a non-Christian religion to make pilgrimages. This person suffered financial problems and had to surrender his land holdings to the bank of a major Cold War player, to the great embarrassment of the British Colonial Administration, which did not want to upset China by allowing that player to own a settlement in Hong Kong. Through skillful maneuvering, the government ensured that the land was sold to a Hong Kong company with the condition that the place would be developed into a residential area. The terms were harsh from the vantage point of a normal developer.

Those familiar with land administration in Hong Kong, which is a mode of private planning by contract (Lai, 1988, 2010, 2014b), would be amazed by the change in mindset of the administrator in drafting such a land exchange document. It is unique in nearly all key aspects. Apart from the requirement for the prior approval of any master layout plan and specification of several types of public buildings, there is no pre-specified gross floor area or building height control. It would be almost impossible for an estate surveyor or appraiser to find a “market comparable” in assessing, if the premium paid by the grantee (HK$61,500,000 in 1979) was a fair market value. As every additional building entailed the endorsement of a new master layout plan, the developer would therefore have no “as of right” land use. However, there was an unprecedented advantage for the developer: there was no need to pay any modification premium. The first payment was the last to the government.

According to the Conditions of Exchange (for New Grant No. 6122), the government, as the landlord, did not need to provide any road connection, any infrastructure such as water supply, drainage, sewerage, and so on, or any site formation for essential public transport facilities. The developer, as the lessee, had the obligation to

erect, maintain and keep in use on the lot membership club houses and a leisure resort and associated facilities which shall include an hotel or hotels, a dam, a reservoir, salt and fresh water storage and treatment areas, a sewage treatment plant, a refuse disposal point, a cable-car system, a ferry pier and a non-membership golf course (in these Conditions called “the minimum associated facilities”).

In addition, he had to build “at his own expense” a fire station and drill yard and a police station according to government standards to be leased at US$ 0.2 per annum each to the government, water supply for firefighting, and so on.

The government did not conduct any administrative layout planning for the area. The developer had to formulate its own master layout plans and “design and disposition” of all buildings for the prior approval by the Secretary for the New Territories (later Lands and Work) and then build the whole settlement from scratch. Therefore, the developer acted as a private new town corporation. While there was no time frame for “the minimum associated facilities,” and no hotel or cable car system has been built, the developer did construct a reservoir by damming a valley. It built a golf course. It erected a fire station, a police station, and a sewage treatment plant. And it constructed a pier and established a private high-speed ferry service to make the sale of its first developments viable.

We have no evidence of what kind of negotiation had occurred before the land exchange was effected, although it is certain that some exchange of information and ideas did take place. The developer acquired rights to develop with great flexibility in land use mix, phasing, scale, and intensity, while the government was and remains free of any liability to supply any public infrastructure.

Gradually the place, later known as Discovery Bay, became a successful resort-type town welcomed by those who prefer a lifestyle away from Hong Kong’s busy residential and commercial hubs. The settlement is unique for being free of ordinary private cars. When the government permitted a tunnel road link to Lantau’s main road system, when the island was connected to the rest of Hong Kong by the Tsing Ma Bridge, only buses could enter and leave Discovery Bay.

After decolonization, the government selected Penny’s Bay nearby to be the home of the first Disney theme park in China, showing that it recognized the success of Discovery Bay in terms of environmental quality and image.

Discovery Bay is a real case of private planning based on a land contract, the Conditions of Exchange, with the government. The contract created the right to build housing according to the developer’s master layout plan and was free from the politics of the Town Planning Board until 2000, when the settlement reached its first mature stage.

The initial right to build was conferred at a time when the government had no idea of where Lantau Island fitted in planning scenarios. Furthermore, this was then a little known area in the wilderness, so the new right was in some respects purely a way to escape a political crisis with a special form of externality. However, the lease conditions were the result of cooperative negotiations with both sides taking on much risk. The government apparently did not want Discovery Bay to become a financial bubble that could affect homebuyers, as had been the case with the failed 1920s Kai Tak project. In consequence, it massively restricted access by confining it to ferry only. From the developer’s side, there was agreement to pay all the costs of converting unserviced rural land in an isolated enclave outside the planning system into a settlement with reliable connections to the CBD in Central.

Further rights created by revising the original master layout plan have been products of Coasian negotiation understood as the developer accepting restraints and the government making concessions, neither getting exactly what each might have preferred. The developer maintained the image of a resort town by adhering to its original design of low and medium rise housing in concordance with the topography—notwithstanding the fact that property speculation typically favors smaller units with higher densities and building heights. The government, on the other hand, accepted revisions to the master layout plans by agreeing to more housing blocks, that is, to greater density of occupation, as Discovery Bay grew. By and large, the town is ungated and members of the public from the urban core of Hong Kong are able to visit and discover what is happening to this settlement or use it as a convenient starting point for hiking on Lantau Island. The developer increased its returns on its investment—although not as greatly as unfettered development would have realized. Government gained higher income from rates—although not as much as it could have from lease modification premia. The environment was not destroyed—although it was neither preserved in statu naturae nor consumed in suburban sprawl.

Socially, a political crisis, as a negative externality, was averted not by political, but economic, means, which fostered a new suburban ecology open to visitors. The platform for sustainable development was the land contract in which rights were created. Planning until 2000, when the first statutory zoning plan was imposed, was purely contractual. Now the continued development of this place is subject to public scrutiny of the social accountability of the developer via an elected Legislative Council and the appointed Town Planning Board. The latter is heavily influenced by the government planner.

The success of Discovery Bay, which was based on a land contract and still evolving, can be compared to the fate of Peel Town settlement (Burke et al., 2010), which was created under an agreement between the Swan River Association headed by Thomas Peel, brother of Robert Peel, and the British Government for free settlers.¹¹ Advertised as a place flowing with “milk and honey,” Peel Town, as an example of early 19th century private planning, had a short life of only 7–8 months from December 1829 to July 1830. It was abandoned after settlers obtained releases from their obligations from the governor. The agreement for the Crown to grant land to settlers in this part of Western Australia was far simpler than the land contract for Discovery Bay. Peel Town had two main conditions for the settlers to obtain land, namely, their arrival on the land before 1 November 1829 and supplying an agreed-upon amount of agricultural produce. Why did it fail? What happened was that the first ship carrying the settlers arrived late and the land was sandy, arid, windy, and, hence, unproductive. Any person who entered into the agreement, which could not work, did not have the correct geographical knowledge of the site or the sense to gather such information. Our view is that Discovery Bay as a settlement avoided a similar outcome because neither a very specific time limit nor a payment in kind was imposed by the Crown. The only adverse comment is that no major ecologically beneficial uses have been developed.

Case 2: French oyster culture

The story of oysters in England and France was told well by Nield (1995) in terms of facts. Both countries responded to the problem of the dissipation that occurred because oysters were an open access resource.

In England, despite the evident problems of ostreiculture as a result of over-exploitation on the one hand and, half a century later, market collapse because of health scares as a result of sewage pollution on the other, effective regulatory action was ruled out. With over-exploitation, a Royal Commission report in 1866 “liberal” England ruled out the private enclosure of the resources. The reasoning behind this, in the name of laissez faire, was that there were and should be no government regulations of any form because of the common law freedom to appropriate fish, a view still supported by Anker (2002) who treats “property rights” as unfair to poor fishermen.

Half a century later, when market collapse followed health scares as a result of water pollution, while there was less of an ideological reluctance to act, this time, because of conflicting rights as between private producers and public authorities, it could not be agreed where regulatory authority should be vested, and so no action was taken (Nield, 1995).

In both instances, a standard story of the tragedy of the commons was followed by a massive population collapse in the first and the decimation of an industry for both.

The British government refused to change its mindset about the lawful use of common resources. The concern for the social overrode that for the economic and environmental outcomes. The result for the oyster trade in Britain was dealt, as Neild notes “a severe blow with lasting effects.” By the late 20th century, 99% of European oysters were from France and less than a tenth of a percent from Britain, whereas in the early 19th century each had produced broadly similar quantities (Heral and Deslous-Paoli, 1991; Nield, 1995).

By contrast, the French had reacted in 1766 by trying—if ineffectively because of poor enforcement—to control their oyster fishery. In 1787, the basic approach was strengthened and a right was assigned to oyster fishermen in Cancale in Brittany to elect some of their number to enforce measures to close the fishery seasonally, at the end of the closed season to assess the oyster beds, and then to decide which areas could be fished. This achieved the purpose of saving the resource. The French Government also promoted R&D and educational qualifications. Whether this in itself was fruitful is not as important as the opening up of a “development path” on which private innovations of various kinds (Clark, 2006) could lead to the creation of vibrant oyster farming and a highly specialized oyster restaurant business. The “major innovation was administrative, with the 1852 law to regulate the exploitation of public maritime areas so that land for oyster production was state leased to farmers, Later modified in 1983 and 1989, the law is still in force” (Buestel et al., 2009: 813). Such achievements have been wrongly credited to “mercantilism.”

The correct economic theoretical terminology is that the English responded to oyster dissipation during the 19th century by refusing to accept a degree of exclusive property rights over an open access resource, whereas the French created rights for the oyster industry. Liberal rent dissipation in the absence of exclusive property rights is hardly liberal in the real sense, whereas state intervention to create rights and promote standards is not purely regulatory, but fits well within the Fourth Coase Theorem (Lai and Lorne, 2015), which covers the patenting of lighthouses to merchants in England (Coase, 1988).

The French model, which attracted the early attention of Americans (Dean, 1892), might have been the precursor to Norway’s salmon culture, which is another successful business story of transforming a wild resource subject to over-exploitation into the volume production of an enhanced quality product through state licensing (Hersoug, 2005).

An example of the application of the French approach was the Parks and Wildlife Act of 1975 that adopted the newly independent nation Zimbabwe (Anderson and Grewell, 1999).

The Colonial Hong Kong Government partly followed the French model in 1982 by granting marine fish-farming squatters’ exclusive licenses to rear coral fish in designated spots after surveying the areas. This enabled the development of a live marine fish restaurant business in Hong Kong, which eventually spread to other cities in China (Lai et al., 2014).

Note that the creation of new exclusive property rights over an open access maritime resource like oysters, salmon, or coral fish has not only achieved what resource economists contemplate: curtailing efforts to exploit the resource in question by enclosing a wild species. That would only bring about a win–lose situation that cannot be considered sustainable. It has also enabled investment in nurturing the resource and associated downstream services like quality grading, transportation, and catering. This has created more employment in many diverse trades that were previously unimaginable in a scenario in which the resource was open access or merely enclosed against poaching.

In this case, the rights were created by edict, as the transaction costs of negotiating with an unascertainable number of stakeholders would have been prohibitive. Above all, the previous law had to be changed. However, a process of political negotiation was present and de jure rights were assigned to empower those who had de facto control of the access to the resource. This reduced the transaction costs of opposing the new legal regime.

Conclusion

The practice of planning in tackling negative externalities has been articulated by academics either in the light of Pigovian interventionist measures of correction, prevention, prohibition, and taxation on the one hand or Coasian contractarian solutions of internalization and transformation on the other. The former four entail attenuation of private property whereas the latter involves an exchange of existing legal rights, one often loosely described as “Coasian bargaining.” This article explores a seventh potential solution for removing negative externalities without the state infringing private property with the focus on creation of new property rights by contract and by edict in lieu of attenuation or exchange of existing rights.

A neo-classical-based Coasian bargaining to achieve an exchange of legal rights has distracted many economists from the potential of negotiation in changing the mindset of stakeholders for innovative development in response to negative externalities. Negotiation or “Schumpeterian” innovation (Yu et al., 2000) is, in fact, beyond the ambit of neo-classical economics, which assumes all costs exhausted by the production function (i.e. zero transaction costs), the best law, and technology. The better view of Coasian bargaining explained in this article suggests that Coasian bargaining is conducive to sustainable development criteria such as the attaining of win–win outcomes for business, environment, and the society. Such an outcome is unlikely to be achieved by top-down order.

Development control that is regulatory and non-negotiable has often taxed the energy of the government planner. This is because in situations of rent dissipation or negative externalities, he or she may underestimate the strategic significance of his or her potential contribution to sustainable development via the creation of property rights. In part, to use a photographic metaphor, this is a matter of focus and of angle and depth of field in the approach of the planner to a given problem. A Coasian understanding enables a wider angle, greater depth of field, and, at least in some respects, a sharper focus on what is most likely to assist the shift of mindset and resultant collaborative effort to find a win–win solution.

The overarching idea of this article is that Coasian bargaining, as a pure exchange phenomenon through the lens of the First Coase Theorem that assumes a neo-classical reality of given technology, does not involve innovation. However, the Coasian spirit of freedom of contract, in light of Coase stressing the power of private property, points to property rights creation and sustainable development in private planning. Two real-world case studies, one being a type introduced to China in the name of “land use rights reform” and the other a French maritime resource nurturing story, were used to demonstrate two commonly used concepts of “property rights creation” in the economic literature influenced by Coase. Each case involves the government planner and creation of some new property rights in the form of capital creation to demonstrate that the planner’s creation of property rights function is an under-researched area.

Footnotes

Acknowledgements

The authors are grateful to the useful comments of three anonymous referees and the advice of the Editor, Professor Michael Gunder.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

Notes

Author biographies

Lawrence WC Lai, a Hong Kong Registered Professional Planner and Chartered Surveyor, is with the Ronald Coase Centre for Property Rights Research and is Professor of the Department of Real Estate and Construction, University of Hong Kong.

Stephen NG Davies taught in the Department of Political Science and now the Department of Real Estate and Construction, University of Hong Kong. He was first Director of the Hong Kong Maritime Museum.

FT Lorne is a Professor of Management, New York Institute of Technology-Vancouver and also with the Ronald Coase Centre for Property Rights Research, University of Hong Kong. He taught economics in UCLA and University of California, Northridge.

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