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Economics Terms A-Z

Tragedy of the Commons

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In economics, the Tragedy of the Commons is a scenario in game theory. It’s a situation where a commonly shared resource is over-exploited because the users of the resource do not have a private incentive to maintain it. But, if nobody maintains the resource, everyone is made worse off than if it had been maintained.

The Tragedy of the Commons is similar to the Prisoner’s Dilemma. In both scenarios, individuals could be made better off if they cooperated. However, private incentives prevent them from doing so, because each player’s dominant strategy is not to cooperate. In both cases, this results in a non-cooperative Nash Equilibrium.

One key difference between the two is that Prisoner’s Dilemma scenarios usually refer to situations where participants face an all-or-nothing decision, know their “opponent”, and strategize accordingly. Meanwhile, Tragedy of the Commons scenarios usually refer to collective action problems where individuals may not know each other. Further, these participants usually have a much harder time understanding or measuring how their actions affect others. Tragedy of the Commons scenarios also tend to entail longer time periods and include more participants than Prisoner’s Dilemma examples.

An example of a Tragedy of the Commons scenario is fishing in the ocean. The ocean is a vast resource that many nations in the world have access to. It holds an abundant but finite supply of fish. Crucially, nobody owns the ocean, and it is very difficult for one nation to prevent another one from fishing.

Each (coastal) nation’s fishing industry can freely access the ocean and send out fishing boats, where the only costs it must pay are the cost of its own fishing equipment and labor. Then, if this nation maximizes its profit function from ocean fishing, it will choose a privately optimal level qi.

But, if every nation chooses to fish its own qi, the supply of fish in the ocean will be reduced below the replacement level (the point at which the supply of fish in the ocean will naturally replenish itself). This leaves fewer and fewer fish left in the ocean each year, making everyone worse off.

Let’s assume in this example that the replacement level is also the socially optimal level of fishing qo. Then, the sum of all qi, q1 + q2 + … + qN > qo, which means that society is overfishing. Each year, the amount of fish in the ocean will be less than the previous year, lowering the utility of all fishing nations. Without an agreement, nations will eventually reduce the stock of fish to near-zero. This will cause the fishing industry to disappear, lowering economic output and reducing the well-being of all nations.

But by cooperating, nations can divide qo by a fair amount that ensures the fishing industry will survive (call it qfair). In the long run, this outcome is better for all participants. Unfortunately, each individual nation has an incentive to fish qi > qfair, since that is their private utility-maximizing level of production. Thus each nation has an incentive to cheat, and it is difficult to ensure cooperation.

By agreeing to fish only qfair, each nation is making a privately suboptimal choice compared to qi since the profit realized from fishing qfair is less than that realized from fishing qi (as qi > qfair). So, each nation is individually better off not cooperating and hoping that other nations will step up and maintain the oceans on their own. In economics, this tendency to “slack off” is known as a free-rider problem.

This situation is similar to the problem of negative externalities in a market. Indeed, in this case, the privately optimal solution for each nation qi fails to take into account the negative externality of overfishing on the nation’s neighbors. If the “cost” of a reduced fish stock was paid for by each nation when it overfished, each nation would be properly incentivized to fish the socially optimal amount. Then, the Tragedy of the Commons problem would disappear.

When factoring in the difficulty of tracking how much each nation is fishing, having every nation agree to a fair quota, and then enforcing the quotas, it’s easy to see how a Tragedy of the Commons situation can remain unsolved.

Good to Know

The Tragedy of the Commons is usually used to describe scenarios where many parties have access to the same rival, non-excludable resource. Rival means that the good in question is made less abundant or enjoyable for others when an individual uses it. Non-excludable means that others cannot be prevented from using the resource. This creates a scenario where each individual is incentivized to consume as much as they can without regard to others.

Other common examples of a Tragedy of the Commons scenario include greenhouse gas emissions, usage of public parks, and even community areas like kitchens that are shared between roommates.

However, all is not lost in a Tragedy of the Commons scenario. One shining example of such a problem that was overcome: the closing of the hole in the Earth’s ozone layer that was discovered in 1985 by Jonathan Shanklin. Nations of the world, alarmed by this discovery, cooperated and moved to quickly ban the chlorofluorocarbons (CFCs) that were causing the problem. The ozone layer has been steadily recovering since.

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