A2.03.05: Common Pool Resources

Question 1

Define common pool resources

Answer 1

Natural resources over which no private ownership has been established

Question 2

State 3 examples of common pool resources and the key natural resources derived from them

Answer 2

• Forests: Key natural resources are timber and pump for making paper
• Seas: Key natural resources are seafood and minerals
• Air: Key natural resources are O2 to breathe and live

Question 3

State 2 reasons that explain why common pool resources have no private ownership

Answer 3

• It Is extremely costly
• It is extremely inefficient to find ways to exclude other producers from accessing these resources (as they are non-excludable)

Question 4

State what no private owner of common pool resources leads to and explain.

Answer 4

Common pool resources, having features of non-excludability and rivalry, often result in the tragedy of the commons as individuals, driven by self-interest, exploit the resources therefore, depleting it for future generations or even current generations

Question 5

State 2 things can self interest be driven by and explain its impact

Answer 5

• Profit motive: For example, private producers will keep cutting down trees if the resources obtained can be used to increase profits
• Fear that other firms will take all the resources available for profit themselves

Question 6

State what persisting self-interest-driven motives results in and explain its impact

Answer 6

Resource Depletion: This has a massive impact on future generations (or even the current generation if they are lost extremely quickly) because:
- Their key source of income may be lost
- The goods and services produced from these natural resources may not be available for consumption benefits

Question 7

Overall, what does the overuse of common pool resources by firms result in

Answer 7

degradation of environments and creates scarcity in the long-run or making inequitable conditions

Question 8

What does the diagram for common pool resources being exploited look like and why

Answer 8

• Negative externality in production diagram (MSC > MPC)
• This is because there is a definite overproduction of goods and services and a misallocation of resources

Question 9

Highlight the theory behind the diagram and common pool resources

Answer 9

Overexploitation of common access resources (difference between Q2 and Q1) will eventually lead to a depletion in these resources. Additionally, the final goods and services made will be priced too low (P1) thus, encouraging more consumption leading to overconsumption and therefore, an overproduction. This is an example of over-x.

Thereby, this results in a misallocation of common access resources, overconsumption and overproduction and a deadweight loss represented by the shaded area.

Question 10

What does the vertical shift on the N.E.P diagram represent

Answer 10

The vertical shift represents the value of the external costs that are gained as these firms are acting on self-interest in producing from these resources