Economics Terms A-Z
Read a summary or generate practice questions using the INOMICS AI tool
There are many different ways that economists classify the different types of goods and services sold in the economy. The characteristics of goods – for instance, whether they are rivalrous or excludable – help economists classify goods into one of four categories. These are club goods, private goods, public goods, and common resources.
Common resources in economics are goods that are rival, but non-excludable. This means that if one person uses the good, it reduces others’ ability to enjoy the good. But, people cannot be prevented from accessing the good. This unique blend of characteristics can cause problems with the usage of common resources.
For example, a public park is considered a common resource. Public parks are freely available to anyone who wishes to go to them. But at the same time, if one person goes to the park, it means there’s less space left for others to enjoy. Park area is not infinite; if everyone tried to go at the same time, it would be far too crowded and noisy to be enjoyable.
Moreover, because a public park is free and non-excludable, individuals’ incentives to keep the park clean and tidy are very low. It’s quite easy for people to use the park, litter, and go home without cleaning up after themselves, which is often privately optimal (at least from a purely rational standpoint, economically speaking). Over time, this degrades the space. In economics, this situation is known as the free-rider problem. In order to keep the park clean and usable, a government authority or the charity of kind citizens is needed.
Some natural resources are also considered common resources. An example is the amount of fish in the ocean. The ocean is a vast resource that every coastal nation in the world can utilize. It holds an abundant (and regenerating), but at any one time finite supply of fish. Crucially, nobody owns the ocean, and while it is very difficult for one nation to prevent another one from fishing (non-excludable), fishing the ocean leaves fewer fish for others to find (rival).
Each (coastal) nation tends to maximize their own private utility functions from ocean fishing; they choose to fish at a privately optimal level. On its own, this amount will not deplete the oceans, because the ocean is so large compared to just one country.
But, if every nation chooses to fish its own privately optimal amount of fish, the supply of fish in the ocean will be reduced below the replacement level (the point at which the supply in the ocean will naturally replenish itself). This leaves fewer and fewer fish left in the ocean each year, degrading the space, making everyone worse off over time.
Incidentally, pollution in the ocean is another way – similar to the public park example discussed above – that this common resource can be degraded. Without cooperating to produce and enforce international law that protects the ocean, each nation is incentivized to over-pollute.
These problems might sound familiar; they are the Tragedy of the Commons. Common resources can exhibit both free-rider and Tragedy of the Commons problems because the incentives in place often encourage participants to act in their own private interest, which in most cases is not aligned with society’s best interests overall.
Rivalrous goods inherently demand that each selfish individual take as much as possible as fast as possible, while non-excludability means everyone can rush to do so. Overcoming this issue and maintaining the common resource can be very difficult, as it requires independent economic agents to negotiate and cooperate.
Good to Know
Common resources are related to externalities as well, as they often allow negative externalities to occur. Being non-excludable but rival, these goods incentivize over-use, which is itself a negative externality.
Another way to conceptualize this: with common resources, “market” participants do not consider the cost of their actions on others in the “price” of their “purchase” decision. For example, when one nation overfishes, they’re fishing a privately optimal amount without considering the negative impacts on other countries from their overfishing. This constitutes a negative externality and contributes to the Tragedy of the Commons problem.