Ask the grumpies: How to subvert the Tragedy of the Commons

Leah asks:

Is there any way to subvert the tragedy of the commons, or are we doomed to that fate? I seem to remember learning some examples way back when I took environmental economics but they all escape me . . .

I just happen to teach a class on this!

The first way we learn about is with government setting property rights and facilitating costless Coasian bargaining.  In the canonical example, there’s a river and a factory and a fisherperson.  The factory pollutes the river which kills some fish.  If the factory owner owns the river, then the fisher can pay it to pollute less.  If the fisher owns the river, then the factory owner can pay them to allow some pollution.  There’s problems with this solution when there’s not costless bargaining, when there’s multiple fishers (that can cause a holdout problem) or multiple factory owners (and they don’t know which ones are causing the pollution), but that’s the “preferred” government intervention when it works because it leads to the least amount of deadweight loss.

Fancier versions of this solution include things like the government setting a specific number of pollution credits and allowing firms to bargain over them.  That’s the idea behind Cap and Trade.

When the Coasian solution is difficult to implement, generally because of bargaining problems or informational aysmmetry, the government can step in a bigger way.

First:  The government can mandate that firms not be allowed to pollute more than a certain amount or fish more than a certain amount or hunt more than a certain amount.  Associations can also take the role of government in order to say, prevent over-fishing, though it’s often harder for a non governmental association to enforce these kinds of mandates.  Mandates are most enforceable when there’s jailtime associated (not just a shell company going bankrupt), though that tends to be unpopular.

Second:  The government can tax things like pollution or things that cause pollution.  Think gasoline taxes or hunting fees.

Third:  The government can subsidize companies to not pollute or to not fish etc.  This option tends to be the most popular with industry.

All of these methods have situations in which they work better or worse than the other solutions.  With nuclear waste, you want a mandate because even a little bit of waste is bad.  With air pollution you might want a tax or subsidy or cap and trade system.  The government can make money with taxes or by selling property rights in a Coasian situation.  Companies tend to lobby for subsidies which makes them more politically feasible.

So the short answer is:  yes, government can subvert the tragedy of the commons.  Market failure is why there is an economic role for government and the tragedy of the commons is one of the causes of a main source of market failure (negative spillovers).  But we need political will for it to work.

12 Responses to “Ask the grumpies: How to subvert the Tragedy of the Commons”

  1. rose Says:

    Thank you! Wonderfully clear and easy to envision and follow.

  2. Matthew D Healy Says:

    Combine your excellent explanation of the economic principles with this superb free book about the constraints imposed by physical and technological reality, and you’ll realize how badly wrong most politicians from EITHER major party are about sustainability. Sustainability without nuclear power, without wind farms, without eviscerating the political power of NIMBIES, without lots of other things that some people dislike is fantasy.

    I am not an economist; I have taken a total of three Econ classes in my entire life and those three were all before 1980. But I know a great deal about the technological issues aspects of sustainability because I went to Purdue in 1978 with the career goal of Solar Energy R&D. I put together a customized plan of study through the Interdisciplinary Engineering department. Unfortunately for me, oil shortage in 1978 had become oil glut when I got my BS in 1982 so I never got to work on Solar Energy R&D. My career went other directions (Biotech), but with a solid early background I have been able to follow subsequent developments in global energy technology in ways not accessible to most people.

    So I can tell you, this e-book is among the best general works on the subject you can find. It’s a bit out of date now, and its author has passed away so there won’t be a new edition, but the fundamentals have not changed all that much.

  3. Revanche @ A Gai Shan Life Says:

    This was really useful, thank you! But it also made me a little sad that it all hinges on political will.

    • nicoleandmaggie Says:

      It is really hard to be an economist. Though I suppose it’s harder to be someone negatively affected by bad policy. So I amend… it is hard to be either a rational economist or one with an once of human decency when politics comes into things.

      • Matthew D Healy Says:

        Unfortunately, the Supreme Court eviscerated laws intended to reduce the effect of money on political will. I used to have a bumper sticker “I’ll believe corporations are people when Texas executes one of them.

      • nicoleandmaggie Says:

        *sigh* Citizens United, man.

  4. Joseph O'Mahoney Says:

    What are the core readings for this topic? Are they all dependent on having a lot of econ math background?

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