Tragedy of Commons

Question 1

Tragedy of Commons (Long Analogy)

Answer 1

The tragedy of commons is an economics problem in which every individual has an incentive to consume a resource, but at the expense of every other individual - with no way to exclude anyone from consuming.

Initially it was formulated by asking what would happen if every shepherd, acting in their own self-interest, allowed their flock to graze on the common field. If everybody does act in their apparent own best interest, it results in harmful over-consumption (all the grass is eaten, to the detriment to everyone). The problem can also result in under investment (who is going to plant new seed?), and ultimately total depletion of the resource. As the demand for the resource overwhelms the supply, every individual who consumes an additional unit harms others (and themselves too) who can no longer enjoy the benefits. Generally, the resource of interest is available to all individuals without barriers.

Question 2

Key Takeaways of Tragedy of Commons

Answer 2

The tragedy of commons is a problem in economics that occurs when individuals neglect the well-being of society in the pursuit of personal gain. This leads to overconsumption and ultimately depletion of the common resource, to everyone’s detriment. For a tragedy of commons to occur a resource must be scarce, rivalrous in consumption and non-excludable. Solutions to the tragedy of commons include the imposition of private property rights, government regulation, or the development of a collective action arrangement.

Question 3

Tragedy of Commons on a diagram

Answer 3

Supply vs demand diagram, where supply represents social cost vs private cost. Increase in social cost, and actual price is the cost seen by individuals and the efficient price is the true social cost of tree cutting.

Question 4

Depletion of Fish Stocks EXAMPLE

Answer 4

Fish stocks around the world have fallen considerably. Reasons for this depletion include:

1. A lack of property rights over the sea, as ownership is difficult/impossible to establish.
2. There is also information failure because fishermen do not know the size of available fish stocks.
3. Externalities are also associated with fishing, given that fisherman fail to take into account the impact of their actions on others, including the impact of over-fishing on other fishermen in the future.
4. High fixed costs for boats incentivize lots of fishing to cover the fixed costs.
5. Fishermen are heavily subsidized, which encourages them to catch more.

Question 5

Depletion of Fish Stocks EXAMPLEII

Answer 5

6. Prisoner’s Dilemma: there is an incentive for fishermen to catch as much as they can because that is what they expect others to do.
   - a prisoner’s dilemma is any situation where the ‘pay-off’ from an action depends upon decisions made by other parties. This means that an individual’s behaviour is influenced by the predictions by how others will react in response to their dilemma.
   - fishermen will predict all other fishermen to catch as much as they can and the combined outcome is that shrinking stocks encouraged more fishing and not less! Even if fishermen agree to limit their catch many will expect others to cheat, hence cheating would become the ‘norm’.

Question 6

Remedies to reduce the amount of fishing

Answer 6

1. Establishing or extending property rights over the sea
2. Special conservation tax. Effectiveness depends on the PED for fish.
3. Complete or partial ban on fishing. However, there will be a welfare loss if ‘too little’ fish are caught, including the loss of jobs.