Lesson 2: The tragedy of the commons Flashcards
State utility maximizing issue
Difficult to define an issue: What utility and for whom? Jeremy Bentham: The greatest good for the greatest number Adam Smith: Freedom to act in own self interest. Markets and the invisible hand do the rest.
How do individuals maximize utility?
Maximize utility by obtaining goods Think Maslow’s hierarchy of needs
Critique of Bentham
Impossible to do the greatest good for the greatest number: 1) Interpersonal utility comparison is not possible => Cannot quantify and cannot compare different measures 2) We can mathematically only maximize for one variable at a time
Critique of Bentham
Impossible to do the greatest good for the greatest number: 1) Interpersonal utility comparison is not possible => Cannot quantify and cannot compare different measures 2) We can mathematically only maximize for one variable at a time
What is the tragedy of the commons?
Benefits are private but costs are socialized (socially suboptimal outcome) => Example of a pasture, where herdsmen have to decide whether to add an extra cow or not => Adding a cow is a rational action
Commons: Utility of adding a cow
U=1-1/n Net benefit of adding one cow, normalized to 1: More cows added, the greater the benefit.
Commons: Cost of adding one cow
Overgrazing: -1/n n = number of herdsmen
Commons: Logic of a rational actor
U(add)=1-1/n>U(not add)=0 Utility of adding an extra cow is higher than not adding one
Commons: How does the utility increase in this function?
U/n = 1/(n^2) The larger the community is the worse the tragedy is
Typology of goods: Terms
Excludability: exclude others from consuming the good Rivalry: adding another consumer diminishes the amount left for other consumers
Typology of goods: Matrix
Examples: • Peace, Econ. Growth: public good • Shoes, beer, suits, car: private goods • EU, indoor gym with lots of services offered: club good • Fishing/ocean, Grassland, Mine: common good
Typology of goods: Terms
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Typology of goods: Matrix
Excludability: exclude others from consuming the good Rivalry: adding another consumer diminishes the amount left for other consumers
Typology of goods
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Typology of goods
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Typology of goods
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Commons: What is a strategic situation?
One where the outcome depends not only on own actions, but also on those of others
Tragedy of the commons in game theoretic terms
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Tragedy of the commons in game theoretic terms
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Nash Equilibrium
1) The set of actions that constitute simultaneous best responses
Pareto Optimum
It is not possible to make at least one actor better off without making another actor worse off
Pareto Optimum
It is not possible to make at least one actor better off without making another actor worse off
How can we solve public goods/ common pool problems?
Through state intervention: -Privatize: Establish property rights - Allocation principle (merit, rotation, lottery) - Institutions: Monitor and enforce (e.g. pollution tax) Or through social norms: - Reciprocity - Altruism
RQ: 1) What is the tragedy of the commons?
In the common pool/public goods context: Depletion of resources due to individually rational behavior
RQ: 2) How can we define common pool resources, public goods, club goods, and private goods?
– Use distinctions between excludability and rivalry – Define based on presence of these characteristics
RQ: 3) Which game-theoretic model can we use to study public goods/common pool problems?
Prisoner’s dilemma game
Tragedy of the commons in game theoretic terms
Image NE is pollute/pollute, PO is not pollute/not pollute
Nash Equilibrium
1) The set of actions that constitute simultaneous best responses (maximize own utility given the utility of the other actor) 2) Outcome in which no player has an incentive to unilaterally deviate
Pareto Optimum
Property of an outcome: It is not possible to make at least one actor better off without making another actor worse off
How can we solve public goods/ common pool problems?
Through state intervention: -Privatize: Establish property rights - Allocation principle (merit, rotation, lottery) - Institutions: Monitor and enforce (e.g. pollution tax) Or through social norms
RQ: 3) Which game-theoretic model can we use to study public goods/common pool problems?
Prisoner’s dilemma game
When an outcome only hinges on what you do as a singular actor
Decision-theoretic problem
Pareto improvement
When the situation/ utility of two or more actors is improved
Issue with state intervention in solving public goods problems?
Too costly
Social norms to solve public goods problems
- Reciprocity (conditional cooperation → I am willing to contribute, if you do so as well) - Altruism (own welfare depends positively on other’s welfare) → Not costly
