Essay on the Commons Problem

“Suppose that the earth yielded spontaneously all that is now produced by cultivation; still without the institution of property it could not be enjoyed; the fruit would be gathered before it was ripe, animals killed before they came to maturity; for who would protect what was not his own; or who would economize when all the stores of nature were open to him?… In this country, for instance, where the only common property consists in hedge-nuts and blackberries, how seldom are they allowed to ripen…”
–          Mrs. J. H. Marcet, Conversations in Political Economy, 1819.

The English proverb, “The early bird catches the worm,” encapsulates the driving force behind the problem laid out in the quote from Mrs J. H. Marcet’s, Conversations in Political Economy, 1819. The proverb sums up the rivalrous nature of the commons problem in which humans compete to improve their utility.

In this case, it is the worm that is a common good, because it is available to all but it is only available in limited supply. Birds that arrive too late are likely to miss out on a feed and so the proverb encourages us to get up early if we are to beat our rivals in our daily lives

However, Mrs Marcet’s quote shows us what happens if we follow this advice. The hedge-nuts and blackberries are the common goods and reflect what Garrett Hardin described as the “Tragedy of the Commons” in his 1968 paper.1 Since these goods are in limited supply, people try to beat others to the fruit by picking them earlier and earlier in the life-cycle to the point at which they are not given the chance to ripen, leading to the scenario where all members in the local community lose out.

The person who picked the fruit, may gain the fruit but it is underdeveloped and less satisfying than if it were fully ripe. The rest of the community, on the other hand, misses out completely.

Although, common goods are accessible to all, there is a clear difference between a common good and a public good. Public goods are also accessible to all but the consumption by one individual does not prevent others from consuming the good or diminish their enjoyment of it.2 Examples of public goods are street lighting and national defense. Street lighting is a public good because everybody who walks along a well-lit street at night benefits from the light and the light continues to shine after an individual has moved past it.

Public goods can be funded in various ways. Firstly, the government may decide to pay for it out of tax revenue or a public good may be provided by the private sector. However, private sector provision can lead to the free-rider problem when too few individuals are willing to pay for a public good leading to a Pareto inefficient outcome i.e. Pareto efficiency is when no one can do better without making someone else worse off. So it is Pareto inefficient if it has not reached that point i.e. you can still do better without making someone else worse off. Mas-Colell (1990) says the inefficiency of private provision can often be remedied by governmental intervention in the provision of public goods either by direct governmental provision or by taxing or subsidizing the private provider.

For example, a private company may receive a subsidy if it provides a public good deemed necessary by the government but it is unable to sell that good at an affordable price. In this case, the government will pay the firm subsidies. This is most obvious by the large subsidies provided by the European Union to ensure farmers do not go out of business as they compete with farmers from poorer countries. Alternatively, a small number of energy companies provide gas and electricity to UK households but regulators enforce price caps to ensure customers are not deemed to be overcharged.

Common goods are often goods that may at first seem to be public goods but when a critical level demand is reached the quality of the good suffers due to overuse.

In Hardin’s paper, he describes a situation in which an area of land is free for all herdsmen to use to graze their herd. However, a rational herdsman knows that if he can add an extra animal to his herd he can earn more from the eventual sale of that animal. But, if every herdsman has the same strategy, the common land on which the animals graze will deteriorate since the land will not have time to replenish and all herdsmen will eventually suffer from a depleted resource.

This problem is most obvious in the fishing industry where overfishing is common around the world. Fishermen try to maximize profits by trawling the seas to gather a large catch, which they can then take to market but if all fishermen in the industry do this, fish stocks suffer because there is not enough time for the stocks to replenish. A Wall Street Journal4 story, January 2011, drew attention to this problem in Turkey where large commercial fishermen use sophisticated equipment to track fish but which has led to a drop in fish stocks.

Empirical and theoretical research undertaken over the last 30 years following Hardin’s paper has shown that tragedies of the commons are real, but not inevitable.5

In developed countries very little food now comes from common land. Crop and cattle farming are now largely undertaken on private land in the UK where beef is one of the most widely eaten meats, cows are a long way from being extinct and crop rotation ensures the quality of the land does not deteriorate. New farming techniques and technologies have allowed farmers to be more productive, with genetically modified crops able to grow in harsher conditions and while cattle are bred specifically to maximize their milk production. In some ways, this solution comes down to the consumer.

Private farming has allowed the cost of food to remain affordable as the population has grown but the quality of the produce has been called in to question with the growth of organic farming. For example, a farmed salmon can easily be identified from fresh water one even before the price tag has been checked. While a privately owned timber producer may fail to invest in adequate replanting but continue to over produce timber leading to the deterioration of the forest.

Government subsidies and incentives can provide solutions in some cases but it cannot be universally applied to all commons problems.

In Maine, USA, the lobster population plunged over the years and the size of the lobsters shrunk significantly until a co-management system was introduced whereby government scientists set goals for the state’s lobster population but the fishermen decided on the best way to achieve these goals. Lobster numbers have since climbed, replenishing the stocks but giving all the credit for the success to the regulatory controls may be premature since some scientists believe the strengthening of lobster populations is more closely linked to the 70% drop in the numbers predatory cod stocks due to overfishing.6

In the Maine lobster fishing community, controls can be monitored to ensure breaches of the regulations do not occur but in other instances such as in the cod fishing industry, tracking rogue fishermen who see the incentive of potential profits as sufficient reason to break the regulations can be more difficult. When this happens it risks breaking the trust of the whole fishing community and could lead to more fishermen breaking the regulations if they think they can get away with it.

An alternative approach to managing the commons problems is the use of tradable permits. According to an OECD survey, air-pollution, fisheries, water source management, water pollution and land-use control have all seen an increase in the number of applications for tradable permits in an attempt to restrict environmental damage caused by these activities. Baumol and Oates (1971)7, theorize, “That under specific conditions, an appropriately defined tradable-permit system can minimize the cost of reaching a predefined environmental target.”8 Highly polluting firms will bid more for the permits than cleaner firms while all firms have the incentive to reduce emissions to keep costs down and to maximize profits.

The adoption of the Kyoto Protocol in 1997 committed many of the world’s countries to reducing emissions to 1990 levels. One problem was, however, that countries feared their industries would lose competitiveness to international rivals if they introduced emissions regulations but the introduction of emissions trading has helped to ease some of these concerns.

Caps on carbon dioxide emissions were introduced by the European Parliament forcing polluters to invest in permits, while in the U.S, even though the government refused to sign up to the Kyoto Protocol, voluntary caps on carbon dioxide and methane were agreed by many companies, states and municipalities and permits could until recently be traded on the Chicago Climate Exchange.

However, such initiatives rely on credibility not only of the legislators’ commitment to reducing emissions but also on the credibility of the market participants. In November 2010, the owners of the Chicago Climate Exchange announced that it planned to close the exchange due to lack of support from the U.S. Senate.9 Without a legal framework incentivizing polluters to reduce emissions, paying for emissions credits becomes an unnecessary cost and, therefore, the market collapsed.

Although, emissions trading on the European Climate Exchange is built on solid EU legislation, the market has been hit by several scandals and in January 2011 the exchange closed for a week to allow the European Commission to investigate suspected theft.10 Like any market, for it to work efficiently, participants must have confidence in the exchange and they must feel secure in the fact that fraudulent practices are not distorting the market.

In theory, emissions trading is a good idea, aimed at incentivizing polluters to introduce cleaner processes. The success of the project will not be obvious for some years but the key aspect is whether the emissions credits become just an affordable cost especially for the more profitable firms or will it drive research into greener, more environmentally friendly processes.

A similar idea has been discussed by the British parliament whereby citizens are issued with Tradable Energy Quotas (TEQs) and each time they buy electricity and fuel their TEQ account is discounted.11 If energy were bought from renewable sources, fewer TEQ credits would be discounted. Once a citizen’s TEQ allotment has been exhausted, the citizen can buy extra TEQs from citizens who have TEQs surplus to their requirements. This way, citizens would be incentivized to invest in greener energy sources and be more efficient in their energy usage.

However, in research undertaken by Bramoulle and Treich (2009),12 it was found that severe uncertainty surrounding the possibility of an environmental catastrophe may have a positive impact in a context of global pollution. Despite the Kyoto protocol, the international community has struggled to agree to binding cooperation mechanisms targeting the reduction of greenhouse gas emissions. Bramoulle and Treich suggest that the continued uncertainty of the future climate need not damage economic welfare.

The research draws on the experience of moral hazard when purchasing fire insurance. When an agent is fully insured, he is likely to take fewer preventative measures so he becomes less risk averse when uncertainty is lower.

The paper introduces a model of global pollution under uncertainty and considers an n-player game in which agents benefit from emitting pollution but suffer from the global level of pollution. The pollution causes an uncertain level of damage and the risks to the agents are investigated in circumstances where the risks of damage are the same for everyone and also where the risks of damage are identically and independently distributed across the individuals.

It finds, “The variance of damage increases with pollution, so polluters can reduce the risk faced by decreasing their own emissions. Although this action is taken from a purely individual point of view, it has positive social consequences: it tends to alleviate the negative externality. Welfare may even be higher under uncertainty than under certainty when the positive effect of reduced emissions is larger than the negative effect of uncertainty.”

However, Bramoulle and Treich conclude that cooperation to finding a solution to a commons problem such as climate change may be less under uncertainty but social welfare may be better.

“Hence, by partly alleviating the commons problem, uncertainty may also reduce the incentives to fully solve it.”

Such a policy is not a solution to the problem of climate change or other commons problems, it merely delays the inevitable deterioration of the common good and provides a pedestal for those who risk losing out from any change to the current status quo.

As discussed, the role of government does have potential benefits especially in larger scale commons problems where the tariffs raised from selling permits can contribute to policing regulations.

But, there are examples where informal agreements between agents, without government intervention, have led to successful resolutions to the commons problem.  Informal agreements to self-regulate are only usually successfully where the group of agents is relatively small and each agent can police each other.  This is called a local commons.

Seabright (1993)13 explains how the system of informal incentives in cooperative behavior can be explained in terms of a repeated prisoners’ dilemma game. Individuals realize that the long-term gain through cooperation outweighs any short-term, selfish gain. A series of credible retaliatory strategies known to all members of the group should be severe enough to ensure all individuals cooperate.

Cooperation between members of relatively small societies is not a new concept. Before the privatization of landed property, McEvoy (1987)14 says English farmers met twice a year to discuss production for the coming months. “On those occasions they certainly would have exchanged information about the state of their lands and sanctioned those who took more than their fair share from the common pool.”

This form of self-regulation is captured by a quote in the San Francisco Chronicle in 1907,  “If any Italian thinks it is possible to catch crabs for the market without joining the association, let him try it,” clearly showing the threat of retaliation necessary to ensure tight controls over the allocation and harvest of California crabs.

A more modern example of successful local cooperation of common pool resources is the farmer-managed irrigation systems of Nepal.15 W.F. Lam found that local communities in Nepal achieve greater irrigation performance and sustainability than well-meaning aid agencies or government owned systems. In fact, it was found that government ownership and the presence of modern head-works have a negative impact on overall system productivity.

In commons problems such this, the application of local knowledge and the collective trust of the community helps to contribute a much better solution. This also highlights the importance of members having a credible reputation, which can take many years to build up. In small, close-knit communities, credible reputations are built up over many years but often the community will feel threatened by new comers to the community, “and may fail to enforce their own self-restraint, or they may even join the race to use up the resource.”16 The incentives in this case are a combination of not only producing a successful irrigation system that benefits all members of the community but also individuals feel obliged to uphold their long-held reputation.

The importance of tradition and institutions of collective action is a point made by Seabright (1993) and emphasizes that cooperation can be habit-forming,17 leading to a greater chance of successful collective action in the future.

However, this makes it more difficult for such forms of collective action to work where there has been a history of distrust and secrecy about the way in which agents go about their business. The incentive to cooperate must be sufficient to ensure all agents agree to a set of regulations to protect a common good.

In an industry like banking, incentives to maximize profits are already very high and any attempt by regulators to protect the wider economy from excessive risk-taking and malpractice are seen as hampering the profit-making business. Furthermore, banks are extremely secretive and suspicious of competitors, making it difficult for all agents to agree on any form of new regulation within the industry, which has led to long, drawn out lobbying campaigns and legal battles especially in the aftermath of the financial crisis.

In instances such as this, where the firms, industries and governments are wary of losing the competitive edge, it makes it particularly arduous to agree to any form of cooperative solution without some form of arbitration.

The commons problem has many forms and many different solutions for each individual case, but as the population of the world continues to grow, the world’s resources will become increasingly pressured. Government-led or more informal cooperation have helped find solutions but technological advance has possibly played the most important factor in ensuring that the demand for goods is met by sufficient supply. Environmental scientists are now investigating geo-engineering solutions to climate rather than convincing the world to change the way in which they live their lives. Scientists are developing genetically modified crops that can be grown in much harsher climatic conditions and which flower multiple times a year, increasing the annual crop size.

However, technological advances often take many years to develop and in the mean time, communities must find incentivized, cooperative solutions to protect the goods common to all.

REFERENCES

1. “The Tragedy of the Commons,” Hardin, G. 1968

2. “A Course in Microeconomic Theory,” Kreps, David (1990) page 168

3. “Microeconomic Theory,” Mass-Colell, A., Whinston, M. D., Green, J. R, (1995), page 362.

4 Wall Street Journal article on overfishing January 5 2011. http://online.wsj.com/article/SB10001424052748704723104576061990776738036.html

5. “Toward An Interactive theory Of Nature And Culture: Ecology, Production and Cognition in The California fishing Industry,” McEvoy, Arthur F., (1987), page 292. Environmental Review: ER, Vol. 11, No. 4.

6. “Claws! Lobsters in Maine.” The Economist, August 19 2004.

7. “The Use of Standards and Prices for Protection of the Environment,” Baumol, W.J. and Oates, W.E. (1971) Swedish Journal of Economics. Vol. 73, No. 1

8. “The Tradable-Permits Approach To Protecting The Commons: Lessons For Climate Change,” Tientenberg, Tom, (2003) Oxford Review of Economic Policy, Vol. 9, No. 3, page 401.

9. “Chicago Climate Exchange to shut down emissions trading,” CNN Money, November 17 2010. http://money.cnn.com/2010/11/17/news/economy/climate_exchange/index.htm

10. “Calls for regulation as EU halts emissions trading,” Bloomberg, January 20 2011. http://www.businessweek.com/ap/financialnews/D9KS7TM00.htm

11. “A Policy Framework For Peak Oil and Climate Change,” All Party Parliamentary Group on Peak Oil & The Lean Economy Connection, (2011).  http://teqs.net/report/

12. “Can Uncertainty Alleviate The Commons Problem,” Bramoulle, Y, Treich, N, (2009) Journal of the European Economic Association. Vol. 7 No. 5.

13. “Managing Local Commons: Theoretical Issues I Incentive Design,” Seabright, Paul, (1993) Journal of Economic Perspectives, Vol. 7, No. 4, page 118.

14. “Toward An Interactive theory Of Nature And Culture: Ecology, Production and Cognition in The California fishing Industry,” McEvoy, Arthur F., (1987), Environmental Review: ER, Vol. 11, No. 4, page 299.

15. “Governing Irrigation Systems In Nepal: Institutions, Infrastructure And Collective Action,” Lam, W.F., (1998) ICS Press, Oakland, CA.

16. “Revisiting The Commons: Local Lessons, Global Challenges,” Ostrom, E., Burger, J., Field, C.B, Norgaard, R.B., Policansky, D. (April 9 1999) Science, Vol. 284, No. 5412, page 278-282.

17. “Managing Local Commons: Theoretical Issues I Incentive Design,” Seabright, Paul, (1993) Journal of Economic Perspectives, Vol. 7, No. 4. Page 120.

BIBLIOGRAPHY

All Party Parliamentary Group on Peak Oil & The Lean Economy Connection, “A Policy Framework For Peak Oil and Climate Change,” (2011).  http://teqs.net/report/

Baumol, W.J, Oates, W.E, “The Use of Standards and Prices for Protection of the Environment,” (1971) Swedish Journal of Economics. Vol. 73, No. 1

Bloomberg, “Calls for regulation as EU halts emissions trading,” January 20 2011. http://www.businessweek.com/ap/financialnews/D9KS7TM00.htm

Bramoulle, Y, Treich, N, “Can Uncertainty Alleviate The Commons Problem,” (2009) Journal of the European Economic Association. Vol. 7 No. 5.

CNN Money, “Chicago Climate Exchange to shut down emissions trading,” CNN Money, November 17 2010. http://money.cnn.com/2010/11/17/news/economy/climate_exchange/index.htm

Hardin, G, “The Tragedy of the Commons,”. 1968

Kreps, David, “A Course in Microeconomic Theory,” (1990).

Lam, W.F,  “Governing Irrigation Systems In Nepal: Institutions, Infrastructure And Collective Action,” (1998) ICS Press, Oakland, CA.

Mass-Colell, A., Whinston, M. D., Green, J. R, “Microeconomic Theory,” (1995).

McEvoy, Arthur F, “Toward An Interactive theory Of Nature And Culture: Ecology, Production and Cognition in The California fishing Industry,” (1987), Environmental Review: ER, Vol. 11, No. 4.

Ostrom, E, Burger, J, Field, C.B, Norgaard, R.B, Policansky, D, “Revisiting The Commons: Local Lessons, Global Challenges,” (April 9 1999) Science, Vol. 284, No. 5412, page 278-282.

Seabright, Paul, “Managing Local Commons: Theoretical Issues I Incentive Design,” (1993) Journal of Economic Perspectives, Vol. 7, No. 4.

The Economist, “Claws! Lobsters in Maine,” August 19 2004.

The Economist, “Commons Sense,” July 31 2008.

Tientenberg, Tom, “The Tradable-Permits Approach To Protecting The Commons: Lessons For Climate Change,” (2003) Oxford Review of Economic Policy, Vol. 9, No. 3, page 401.

Wall Street Journal article on overfishing January 5 2011. http://online.wsj.com/article/SB10001424052748704723104576061990776738036.html

Varian, H. R., “Intermediate Microeconomics,” (Third Edition, 1993).

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This entry was posted in Climate Change, Commons Problem, Emissions Trading, Farming, Fishing, Game Theory, Kyoto Protocol, Regulation and tagged , , , , , , , , , . Bookmark the permalink.

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