Tragedy of the commons

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This article describes a market failure situation, i.e. a situation where the rational pursuit of self-interest by individual agents leads to an outcome that fails a Pareto optimality criterion.|See a list of market failures

Definition

Tragedy of the commons refers to the problem associated with common goods: non-excludable goods that are also rival goods. The problem is as follows:

  • Since the good is non-excludable, everybody uses the good as much as they want.
  • However, since the use by one person of the good reduces the quality or quantity of the good for others, the value of the good to everybody reduces.

Context

Further information: 2 X 2 matrix of rivalry and excludability


excludable good non-excludable good
rival good private good (most goods we think about are of this type) common good
the associated market failure is called tragedy of the commons
non-rival good club good public good
the associated market failure is called the free-rider problem


Nature of market failure

The tragedy of the commons is a market failure situation, because the inability to exclude people from using the good leads to its use by people who value them less relative to people who value them more. In other words, it leads to an inefficient allocation of resources.

Another way of framing this is that people who use the good impose an external cost on others who could potentially use the good, by reducing the quantity (or value) of the good to those others.

Examples

Public parks and facilities

Public parks and facilities may undergo the tragedy of the commons. Since these parks are open to all, people use them freely, resulting in their getting overcrowded and misused.

Alternatives to apparent tragedy of the commons

Free-rider problem

Further information: Free-rider problem versus tragedy of the commons

The tragedy of the commons is often confused with the free-rider problem. The free-rider problem can happen to goods that are both non-rival and non-excludable, such as knowledge goods. For such goods, the problem of overuse resulting in decrease in quality for others does not arise. The problem, rather, is that since everybody can enjoy the benefits of such goods without paying for them, getting people to make the payment necessary to make the initial investment in the good is harder.

Solutions to the tragedy of the commons

Enforceable contracts on usage

If the various economic agents that are potentially interested in using the good are sufficiently few in number (so that transaction costs between them are sufficiently low), it may be possible for them to come up with enforceable contracts to place limitations on each other's use of the resources, with appropriate compensation rules built into those contracts. This is in keeping with the Coase theorem, which states that even in the presence of external costs and external benefits, it is possible to reach an efficient allocation of resources if transaction costs are zero.

Forcing excludability

One solution to the tragedy of the commons is to enforce excludability. This can be achieved by charging fees that sufficiently measure the extent to which a person's use of a resource reduces its value to others. For instance, fees for entry into public parks and public places can be a way of preventing the overuse of these resources by people who value them less and move them towards people who value them more.

Establishing property rights

Establishing a property right to the good in question is a way of attempting to tackle the tragedy of the commons. Although the property right does not itself solve the problem, the individual or organization that acquires the property right now has both the incentive and the legitimacy to enforce excludability.

Subsidy from taxes

Public parks are usually maintained by city municipal authorities, which receive their money through revenues collected via taxes. Tax-based subsidies do not, however, solve the problem of people who value the resources less from using the resources.