The Nature of Economics?

[sampson]

How do property rights relate to the problem of a common shared resource and externalities? How does the legal system impact this?

[gall]

When you have a common shared resource, you often run into the problem called the "tragedy of the commons". Essentially, in a common shared resource situation, when you use part of the resource, you are not properly accounting for how your use affects (i.e. costs) the others who share the resource. This leads to externalities that aren't accounted for. For example, if you and other people share lakefront property, and your neighbor decides to dump all his trash in the lake, it would negatively affect you (perhaps in terms of your enjoyment of the lake). But because you and your neighbor both own the lake under common property, the negative externality he has caused on you is not accounted for when he dumps into the lake because he has the right to do so.

The legal system can impact (help?) this problem by abolishing common property and in place, assign property rights. This way, if your neighbor causes a negative externality, you have the right to take action (e.g. file a lawsuit). Even without the assignment of property rights, the legal system can aid you in giving you a venue through which you can "bargain" (in the economic sense) to eliminate any externality costs -- i.e. the court system.

This is a really elementary explanation, but check out the sources below for more information.