I like many things about economics, including the tendency to explain complicated issues through the use of metaphors and other stories. One of my favorite economic stories is the ‘Tragedy of the Commons’. For those of you who haven’t taken Economics 101 (or decided it would be a better use of your time to sleep through the class), here’s the nutshell version:
Imagine a small town, where one of the primary activities is raising sheep for wool. In order to feed the sheep, the owners take them to a field in the center of town filled with grass. For a while, everything goes well: the land more than supplies the sheep with grass, and everyone can graze their flocks as much as they would like without cost.
However, soon the individual farmers realize that they can increase their sheep herd to increase their profits while limiting their costs (as they don’t pay to feed the sheep). A few families start to increase the size of their flocks, causing their income to rise and increasing the strain on the field to provide for all the sheep. Their neighbors notice this, and start to increase their sheep populations as well, which inspires the first farmers to further raise the size of their flocks. Before long, all the farmers are attempting to feed as many sheep as possible, the land starts to be overgrazed, and eventually, the field is unable to support grass or other plant life at all. Without a ready source of arable land, nobody is able to feed their sheep at all, and the town soon suffers economically as a result of the over grazing.
The result is what is known as the Tragedy of the Commons; the benefits of increasing the number of sheep you grazed are privatized, while the costs to the town, the declining quality of the field, were public. Each individual family was directly compensated for increasing the size of their flocks, while the costs of such increases were borne by the village as a whole. As a result, even though each of the families may have known that increasing the number of sheep grazing on the field would lead to a loss of the field, there was still enough incentive for them to do so, and hope that their neighbors wouldn’t follow their lead.
In the real world, one of the most prevalent examples of a common good is the environment. The air, wild animals, and natural settings we all enjoy aren’t directly owned by anyone, but are still considered valuable. Unfortunately, because they aren’t owned by anyone, there isn’t any incentive to avoid overusing them; if a company can make more profit by pouring soot into the air or overfishing, the logical move for them is to do so. There are a few possible solutions to the problem of common goods, most of which involve changing the incentives for the individuals who would otherwise overuse the resources:
- It might be possible to get all the interested parties to cooperate, and act for the good of the group rather than the individual. In our story of the shepherds and the field, if all the neighbors would agree to limit the number of sheep they kept, the tragedy could have been averted. The problem is, a single neighbor who did not agree and increased the number of sheep he held could spoil the whole plan; with one of their neighbors benefiting from a larger flock, the rest of the group would likely increase their flocks in turn, thus causing tragedy again. Similarly, attempting to get all the parties who fish in a river or add pollutants to the air to voluntarily cut back are frequently doomed to failure, if for no other reason than the difficulty in getting unanimous agreement (and then enforcing it).
- Another solution is privatization; by converting a common good into a privately held one, the financial rationale will change, as well. In our story, if each farmer had owned a portion of the field, they would have the incentive to keep it healthy and well cared for; the short term advantage of having more sheep would be off set by the long term disadvantage of having to buy extra food or pay to graze their flock on a neighbor’s section of field. While this tack has possibilities, there are also limitations: it’s only really effective for resources that are fixed in place, like land or trees. If you allow a company to pollute the air above its factory as much as it wants, you’ll soon find the air in the town downwind has gotten incredibly polluted.
- In cases where private solutions are likely to fail, we can turn to government involvement. If the town government charged a fee on each sheep that was grazed in the field, the economic logic would be changed, and there would be fewer farmers taking on huge flocks of sheep. Similarly, a tax on pollution, such as a carbon tax (or a cap and trade program, for that matter), would make it less profitable to engage in activities that produce a great deal of carbon dioxide. The downside, of course, is that governments cost money, and lead to less efficient outcomes than a purely capitalist system.
All three solutions have their place, and a combination of the three used properly can help to resolve the problem of the Tragedy of the Commons. A good environmentalist, and a good economist, will realize the possible solutions, and attempt to use a combination of the three in order to protect the environment; convincing people and businesses to voluntarily restrict their emissions, allowing private businesses to regulate the wildlife on their own property, and having the government intervene when needed makes a pretty solid environmental policy.
(Sheep picture copyright www.copyright-free-pictures.org.uk; all rights reserved)