3. The Market Mechanism, Market Failure and Government Intervention - Tragedy of the Commons

Question 1

What is the tragedy of the commons?

Answer 1

A situation where there is overconsumption of a particular product/service because rational individual decisions lead to an outcome that is damaging to the overall social welfare.

Question 2

What is the assumption of the tragedy of the commons theory and what issue does this create?

Answer 2

It assumes that when making decisions, people take the course of action that maximises their own utility. However, if many people seek to do this, the net effect may be to deplete a resource making everyone worse off in the long run.

Question 3

What hypothetical example is used to illustrate the tragedy of the commons issue?

Answer 3

A hypothetical area of common grazing land, in which villagers all took their cows to this common grazing land, but this led to overgrazing and a loss of the resource.

Question 4

Why don’t people hold back in consumption of a good/service to protect it in the long-run?

Answer 4

Bc individuals can only make decisions for themselves - if they on their own hold back no one else will so the only outcome is that individual loses out - therefore everyone is reluctant to stop consuming so overconsumption occurs

Question 5

What policies can be used to overcome the tragedy of the commons problem?

Answer 5

Voluntary agreements and with informal arrangements among local people based on a strong sense of civic responsibility. Government regulation can limit consumption or use of certain resources.Clearly defined property rights - if common land is given over to private ownership, the private owner has a stronger incentive to manage the resource for optimum outcome. However, the problem of property rights is that it can lead to equity issues (private owners gain monopoly power over tenants). Also if owner pursues short-run profit maximisation he may make the same mistakes.