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.