Property rights and competitive prices🍋

Two current flashpoints for the role of government in a market economy

The overwhelming majority of economists respect certain fundamental principles about the role of government in a market economy. Legislation, for example, should respect property rights and should allow the price mechanism in competitive markets to foster efficient resource use.

Principles such as these reflect basic economic analysis. Property rights and competitive prices are essential elements in the bedrock of a successful economy that supports higher living standards by rewarding enterprise and innovation.

Consequently, economists should respond when Parliament considers legislation that will restrict the property rights of a group in the general population or will impose a price control in one of New Zealand’s most competitive markets. Below we discuss a current example of each.

Spiderweb, Okarito Swamp, Westland. Dave Heatley

A restriction on property rights

The Marine and Coastal Area (Takutai Moana) (Customary Marine Title) Amendment Bill is concerned with customary rights that Māori hold in the management and use of certain coastline resources.

These rights go back well before 1840, when tikanga (Māori customary law) managed access to coastal resources in each tribal area. Common law is clear on the validity of these property rights under the rule of first possession. Professor R. A. Epstein explained this in a lecture he gave in Wellington in 1999:¹

Thus in any conflict between a first possessor and somebody who acquires the land later through force or machination, the law will regard prior in time as higher in right.

Consistent with the rule of first possession, the Court of Appeal in 2003 suggested the Māori Land Court might have authority to assess Māori customary title to some coastline areas. Parliament intervened with the Foreshore and Seabed Act 2004, which vested ownership in the Crown. This led to widespread protest and a new political party in Parliament.

The Marine and Coastal Area (Takutai Moana) Act 2011 replaced that Act. Although it was a compromise that attracted criticism, including from the Waitangi Tribunal, the Act created a framework for Māori customary titles that can be recognised through the Courts.

Case law is still developing under this Act, including a recent decision in the Supreme Court. Nevertheless, the new Amendment Bill increases the threshold that must be met before the Courts can recognise a customary marine title. This will reduce property rights, as currently understood by the courts, held by Māori groups for centuries.

This is an example of interference with private property rights that the Regulatory Standards Bill wants to constrain. Section 5 of that Bill, however, specifically excludes the Marine and Coastal Area (Takutai Moana) Act 2011 from its coverage. On this point, Māori are not being treated equally before the law.

Imposing a price control

The interference with competitive prices comes from the proposal to prevent retailers from adding a monetary surcharge when customers use certain payment methods to complete a purchase.

EFTPOS technology has transformed the retail experience, paying for itself in reduced cash handling and other costs. Inserting a card into a machine and typing a four-digit PIN allows a customer to immediately transfer money to the retailer’s bank account.

A further service provided by most retailers allows credit or contactless payments. Using this technology incurs extra costs; for example, a greater risk of fraud when a PIN is not required. The retailer pays a merchant fee to cover these extra costs.

Consequently, retailers often add a surcharge for customers who choose to use this service. The Commerce Commission advises a surcharge might be justified up to 0.7% for contactless debit payments and no more than 2% for credit payments.²

Parliament is being asked to fix the surcharge at zero, below the marginal cost of the merchant fee paid by the retailer. Although this interference may seem relatively trivial, there are several reasons to be concerned.

First, any ECON101 graduate should know that a price cap unambiguously lowers social welfare. Managers know their businesses, competitors, and customers far better than Parliament. Competitive prices mean they also know the marginal benefit and marginal cost of their services. A price cap set by Parliament can add nothing except an inferior outcome.

Second, the proposal departs from the acceptance on both sides of the House since 1984 that Parliament should promote market competition. Even if a subsidy or tax might be justified, business managers in competitive industries should be free to set prices their customers are willing to pay.

Third, once this principle is breached, the risks of escalation are high. If one side of the House imposes a price control on retailers, the other side will be tempted to impose price controls that benefit their own political supporters, all at the expense of total social welfare.

Further, it feeds a culture where citizens come to feel entitled to receive personal benefits while shifting the associated costs to the general population or to future generations. In our view, this is already evident in some current debates about local government and rates.

Damage to the economic bedrock

The doctrine of Parliamentary sovereignty means Parliament can pass any law it chooses. Nevertheless, our representatives should understand that these two proposals undermine foundational principles for a flourishing economy.

By Paul Dalziel and Caroline Saunders

Paul Dalziel is Research Economist at Wellbeing Economy Alliance Aotearoa. Caroline Saunders is Professor Emeritus at Lincoln University.

Doubtful Sound, Fiordland. Dave Heatley

1. Available at https://www.nzinitiative.org.nz/reports-and-media/reports/the-treaty-of-waitangi-a-plain-meaning-interpretation/.

2. https://comcom.govt.nz/regulated-industries/retail-payment-system/surcharging. A weighted average might be appropriate in some businesses.