Endowment effects. Surveys and experiments reveal that people sometimes demand much more to give up something that they have than they would be willing to pay to acquire it. To illustrate, contrast a situation in which people have an opportunity to “sell” the clean air that they currently enjoy to a polluter to the situation in which people currently not enjoying clean air have an opportunity to “buy” clean air from a polluter. Evidence suggests that people may demand a higher price to “sell” a right to clean air than they would pay to “buy” the same right. An endowment is an initial assignment of ownership rights. The divergence between buying and selling price is called an endowment effect because the price varies depending on the initial assignment of ownership.
Why might farmers place a different value on the right to be free from straying cattle depending on whether they were selling or buying that right? Is it rational to place different values on those rights? How do these flip-flops in the relative valuation complicate an efficiency analysis of the assignment of property rights?