The Economic Problem of the Tragedy of the Commons: Overexploiting Commonly Owned Resources - dummies

The Economic Problem of the Tragedy of the Commons: Overexploiting Commonly Owned Resources

By Sean Masaki Flynn

An important economic problem that results from poorly defined property rights that don’t take account of negative externalities is called the Tragedy of the Commons. Here, you examine this problem in detail.

The economic problem: Overgrazing on a commonly owned field

The Tragedy of the Commons refers to a resource being overexploited due to the perverse incentives created by common ownership. Under common ownership, the resource is open for all to use as they please. These circumstances make rapid use and overexploitation likely because each person has an incentive to use up as much of the resources as possible before others can.

To understand the Tragedy of the Commons, think of a farming town in which most of the land is privately owned. However, there’s one large field of common land where anyone can graze their cattle. In a private field, the owner has an incentive to limit the number of cattle that he puts out to graze. That’s because if he puts too many beasts in the field, they quickly eat up all the grass and ruin the field for later grazers.

Consequently, the owner of a private field puts only a few cattle out to graze. Doing so reduces his short-run profits (because he restricts the current number of cows) but maximizes his long-run profits (because the field stays in good shape, and he can keep grazing cattle well into the future).

With the commonly held field, however, everyone is going to put some cattle out there because the personal cost of doing so is nothing. Nobody has a personal incentive to preserve the field’s future usability. The incentives are actually horribly perverse because if the common field is currently lush with grass, your incentive is to put as many of your cattle out there as quickly as possible to eat all the grass before the field is ruined.

Everyone else sees things the same way, so there is a mad rush to put as many cattle out to graze as quickly as possible. The result, of course, is that the field is rapidly ruined for everyone. So although there’s no personal cost to putting a cow out to graze on a common field, there is a social cost. Each additional cow causes damage to the field that reduces the future productivity of the field.

The difference between what happens to the private field versus the common field is totally the result of the different property rights governing the two types of land. In the case of privately owned fields, farmers have an incentive to weigh the costs as well as the benefits of putting more cattle out to graze. In particular, they take into account how much future profits will be reduced if current overgrazing ruins the future usability of the field.

Extinctions and poor property rights in the economy

Many environmental problems are caused by Tragedy of the Commons situations in which nobody owns the property rights to a given resource. Notably, most animal extinctions are the result of an absence of property rights.

For instance, think of tuna swimming in the open ocean. By international treaty, nobody owns the open ocean. Hence nobody owns the tuna swimming in the open ocean. On the other hand, if you catch a tuna and pull it up onto your boat, you then have a property right over it and can sell it for money. That is, the only way to economically benefit from a tuna is to kill it.

The result is that tuna and many other fish species are hugely overfished, with many near extinction. That’s because each fisherman has the incentive to harvest as many fish as quickly as possible before anyone else. This quickly leads to an extinct species, and fishermen are very aware of the problem. But because of the way that property rights are set up in this case, no individual fisherman can do anything to prevent the calamity.

If one guy decides to hold back and take fewer fish in the hope that by doing so the species will survive, someone else just comes in and catches the fish that he spared. The species will go extinct anyway. As a result, nobody has an incentive to hold back.

Avoiding the economic tragedy

When an economist sees a Tragedy of the Commons situation, his first instinct is to change the property rights system governing the resource in question. Instead of commonly held property rights in which each person has an incentive to take as much of the resource as possible before anyone else does, economists suggest private ownership so there will be an incentive to preserve the resource. Here are a couple of solutions:

  • Area-based property rights: In the case of overfishing, one solution has been to give fishermen private property rights to an entire fishing ground — to all the fish in an area while they’re still alive. That gives the new owners the proper incentive to manage the stock on a sustainable basis.

Furthermore, because only one person has the right to fish in a given area, there’s no longer a mad rush between competing fishermen to harvest as many fish as possible before anyone else can get to them.

  • Permits: For fish species that migrate freely between different areas, a different solution has been developed. In such cases, biologists first determine the maximum number of fish that can be sustainably harvested each year. The government then auctions off fishing permits for exactly that amount of fish. This method prevents the Tragedy of the Commons by creating a new sort of property right — the fishing permit.

It also has the nice benefit of creating a self-sufficient government program. The money raised from auctioning off the fishing permits can be used to hire game wardens to prevent unlicensed fishing, as well as for conservation and wildlife management programs.

  • Local collective management: Nobel Prize–winner Elinor Ostrom studied instances in which the resource-users in particular areas were able to prevent the Tragedy of the Commons by developing local collective-management systems that restrained overuse.

Herders sharing pastures in Africa and farmers sharing irrigation water in Nepal have been able to avoid overexploitation by setting up systems in which outsiders can be excluded from exploiting the resource, insiders can be monitored against overuse, mechanisms exist for punishing those who take more than their allotted shares, and collective-choice arrangements allow most insiders to participate in the decision-making that regulates the system.