Atlantic Cod, a popular fish known for its mild taste and flaky white meat, is largely fished on the Grand Banks (off the island of Newfoundland in Canada) and in the Georges Bank (just off the tip of the Northeastern United States). In the 1960s, these two fisheries produced approximately 1.4 million metric tons of Cod. But by the 1980s, this number had decreased to only 644,000 tons. And by 1994, the catch had dropped to only 94,000 tons.

Why has the supply of Cod steadily diminished over the past half century? The simple answer is ‘over fishing’. The absence of clearly defined ‘property rights’ has destroyed the incentive to economize on the part of fishermen. To understand this, consider the optimal total annual Cod catch. This ‘ideal’ amount would leave enough fish uncaught each year to reproduce and therefore maintain the size of the available fish stock indefinitely. By limiting the catch to this amount, the long-term economic benefits to society from fishing would be maximized.

Figure 1

The socially optimal ‘total catch’, would be the level that balances the current marginal benefits with these marginal costs. To the left of the intersection, the additional benefits of increasing the size of the current year’s catch exceed the costs (including the opportunity cost in future years) and so these fish should be caught. However, beyond the intersection the opposite is true. The costs to society both in terms of over allocation of resources as well as reduced availability in future years exceeds any increased benefits in the current year. So these fish should not be caught.

The reality has been that, in the absence of regulation (and sometimes despite regulatory efforts), fishing has continued well past the intersection point (actually to the point where marginal benefits are zero.) To understand why, put yourself in the place of the fisherman. If you leave a fish uncaught, you lose out on being able to sell that fish. What do you gain in return? If someone else catches that fish then you gain absolutely nothing. If it avoids being caught and is able to reproduce, you do benefit by the increased fish stock the next year. But you share this benefit with thousands of other fishermen and so this benefit is negligible. So the optimal thing for you to do personally is to take all you can catch.

Garrett Hardin (1915-2003), a controversial ecologist, demonstrated, in his 1968 essay The Tragedy of the Commons, how commonly held resources tended to be over utilized. Consider a small village of five farmers in the late middle ages who have the ability to graze their cattle on a piece of public land, ‘the commons’. What is the ‘socially optimal’ number of cattle for them to graze?

Consider the following table. (It’s nowhere near as complicated as it looks, I promise.) The first column is the total number of cattle. The second is the future sale price per cow given a particular number of cattle. Why should this number decline? There are two reasons: First, as anything becomes relatively more abundant (all else equal), its price should fall. (This simply reflects supply and demand.) But also, as more cattle are grazed on a particular piece of land, there will come a point where the land won’t sustain them and they will fail to thrive. (Skinny cows command a lower price than fat cows.) The example only counts up to five cows to keep things simple. But this last principle (known as the Law of Diminishing Marginal Productivity) would apply with a sufficiently large number of cattle or a small enough piece of land.

The third column is the total revenue generated from any particular number of cows. Simply multiply the number of cattle times the sale price per cow for that number (e.g. 3 cows X $70 = $210 in revenue). The fourth column is the marginal revenue from any particular cow. For example, consider that our farmers are currently grazing three cows. What would they gain from grazing a fourth? Revenue for three is $210. Revenue for four is $240. So the ‘Marginal Revenue’ of the fourth cow is $30.

The fifth column is the purchase (or acquisition) price per cow. For simplicity, we can assume our farmers can purchase as many young cattle for $55 as they wish. The sixth column is the total cost for the cattle. This is simply the number of cattle selected times $55 (e.g. 3 cows X $55 = $220 in cost).

So what is the optimal number of cattle for our farmers to graze? The seventh column is total profits earned. For any number of cattle, this is simply revenue minus cost. So what number of cattle maximizes profit? Two. If our farmers graze only two cows they will earn $50 in profit. Or, as shown in the last column, they earn $10 each. If they graze fewer or more, profit declines.

The Malcontent

Ivan, one of our farmers, is discontent with $10. Could he possibly do better? Surprisingly the answer is yes. Although the group as a whole could do no better than $10 each (again all else equal), Ivan can. What if Ivan decides to break with the other farmers and buy and graze his own cow on the commons? The cow would cost him $55 just as before. And how much could he get for this third cow? Well the price of cows would fall if the total increases from two to three. So it looks like cows would only sell for $70 then. Still, that’d be $15 in profit. Clearly Ivan is better off doing this.

And how would Ivan’s decision affect the other four farmers? Before, the two cows sold for $80 each. Now they sell for only $70 each. So revenue has dropped from $160 to only $140. The cost for the two cows is still $110 (i.e. 2 cows X $55). So total profit drops to $30. Dividing this between the four remaining farmers results in only $7.50 each. Ivan’s $5 increase in profits has come at the cost of a $2.50 decrease in profits for the others. They’re probably not very happy with him.

The Tragedy

In The Tragedy of the Commons, Hardin uses this fable to describe what happens when an important resource is held in common. The farmers acting collectively were able to appropriately economize on the use of their public grazing area. As a group, they realized that the total cost of a third cow would exceed the additional benefits. And so they maximized their collective income by limiting their grazing to only two. But since no one was in a position to enforce this two cow limit, there existed an opportunity for any particular farmer to increase his or her own relative income.

If one of them, like Ivan, does so, the result is a gain for that farmer but a proportionately greater loss for the others. But what if they all tried to exploit this opportunity at the same time? What if each farmer decided to purchase and graze his or her own cow? Looking back at the table you can see that total profit is -$50. So they each would lose $10.

This is what has happened with the Atlantic Cod. While the fishing industry (and society as a whole) would have been better off to limit fishing so as to maintain the numbers of Cod available year after year, no particular commercial fisherman had an incentive to limit him or herself to this amount. Wild fish have no ownership rights associated with them until caught. A fish left in the water has no value except for the (highly diluted) potential of increasing future catches. But a fish caught is revenue today. So each fisherman had an incentive to be like Ivan – catch fish so long as the additional revenue exceeded any additional personal cost. The result, as in the Tragedy of the Commons, has been a significant decline in incomes for all commercial fishermen. For example, in 1992, at the beginning of the fishing season in the Grand Banks, the Cod failed to appear. The resulting lost fishing season cost roughly 40,000 people their livelihood.

Imagine two criminals, Butch and Lefty, which have been apprehended by the police. The police separate the two and give each the opportunity to testify against the other. The best ‘joint outcome’ for the criminals is for neither to testify. In this case, they both might get five years based on the limited evidence. However, the district attorney separates the two and makes each a deal. If one testifies and the other doesn’t, then the cooperating criminal can get off without jail time. The one who didn’t testify would get a particularly severe penalty though - say twenty years. But, if they both testify, they each get ten years. That’s better than twenty but not as good as the five they’d get if neither testified. The following two-by-two box represents this. Butch, by selecting between ‘testify’ or ‘not talk’, chooses the column. Lefty, by making the same selection, chooses the row. So for example, if neither testifies then Butch would choose the left column and Lefty the top row. The top left box, five years each, represents this outcome.

Figure 2

So what will happen? If Butch and Lefty cooperate, they might decide that neither should talk. This would be the best outcome a priori. But neither knows what the other does until the game ends. So consider Butch’s incentives. If Lefty doesn’t talk and Butch decides to then Butch can get off with no jail time. But also consider what Butch should do if Lefty does testify. In that case, Butch has to also testify or he’ll get twenty years. So no matter what Lefty does, Butch should testify. So long as the two don’t have some way to enforce a cooperative outcome, they’ll both opt to testify – the inferior group outcome.

Consider the application of this Prisoner’s Dilemma to our problem of the commons. The following box represents the situation for two representative farmers, Patrick and Sven. As demonstrated earlier, the best joint outcome is for both farmers to cooperate and limit the number of cattle grazing on the commons. The top left box represents this outcome. Both farmers are able to earn $100 if they cooperate. (I changed the numbers slightly to make the exposition simpler.)

Figure 3

But as with the Prisoner’s Dilemma, there is an incentive to cheat on this cooperative agreement. If Sven limits the number of cattle he grazes then Patrick can double his income to $200 by increasing the number of cattle he grazes. The same is true for Sven. And if either cheats, the other has to cheat to avoid seeing his income driven to zero. So the most likely outcome is that both over graze the commons halving their respective incomes.

Of course, two farmers might manage to maintain the cooperative agreement. When the number of parties is small, collusive arrangements are indeed easier to maintain. But in the introductory example of the fisheries, the number of participants is in the thousands. So, absent some form of government oversight, the incentive for any commercial fisherman to cheat is overwhelming and so the inferior outcome is the most common.

Ogallala Aquifer

Figure 4

While some communities use the Ogallala for drinking water, 95% of its use is for agriculture. Currently, Guru and Horne (2000) report that the Ogallala is used to irrigate some 16 million acres of cropland throughout the high plains.

An aquifer is a type of commons. It is a commonly held resource that is treated as a ‘free good’ by users. Consequently, most US aquifers are threatened. It is estimated that the amount of discharge from the Ogallala exceeds the recharge by at least ten times. (Guru and Horne 2000) At this level of net discharge, the Ogallala could be depleted in only a few decades.

Highways

Public highways are also a type of commons. All commuters benefit from this commonly held resource. And like other types of commons, these benefits decrease as the usage by others increases. Though not practical in all circumstances, consider the choice made daily between commuting to work by car or public transportation. Collectively we might all agree that the widespread use of public transportation would increase our collective well- being. There would be no congestion when it was necessary to drive and gasoline prices would fall.

However, the incentives for the individual are inconsistent with this ‘socially optimal’ outcome. It is certainly much more convenient to commute in one’s own vehicle as it makes your schedule so much more flexible. And if everyone else were taking public transportation, then there’d be no congestion either. But what happens when everyone else draws the same conclusion? The roads become congested and the benefits to any one driver rapidly diminish. Further, this leads to the reallocation of public resources from the development of public transportation to the further expansion of the highway system. So utilizing public transportation to avoid congestion is no longer a practical alternative.

Condominium Common Area

Apartments are a unique living arrangement. The renter pays for the use of building and any common facilities (such as grounds, pool, gym, etc.) But the renter doesn’t have the ability to ‘control’ the use of these facilities as she or he might with a single-family home.

For example, consider the family dog. In a traditional owner occupied home, the decision whether to pick up after the dog rests with the owner (within reason as communities do impose some limits). If she chooses to defer picking up after her dog then she is the one who saves the time (while she also is the one who must bear the occasional ‘cost’.) But if the owner lives in a condominium, these costs are borne by all the owners collectively. To maximize the usability of the common grounds the tenants collectively would prefer all dog owners to immediately pick up after their pet. (One hundred family pets can do much more damage than one lone family pet.)

But, in the absence of any meaningful enforcement, a prisoner’s dilemma type problem arises. If all other owners are conscientiously picking up after their dogs then a single owner may see little harm to not picking up and see little in terms of harm done by his dog. On the other hand, if all the other owners are neglecting to pick up after their dogs then the owner sees no particular reason to pick up after her dog.

Gordon, H. Scott. “The Economic Theory of a Common Property Resource: The Fishery”, Journal of Political Economy 62, (1954): 124-42

Reprinted in Baden and Noonan eds., Managing the Commons, 2^nd edition, Indiana University Press, 1998

Guru, M., & Horne, J. (2000). The Ogallala Aquifer. Poteau Oklahoma: The Kerr Center for Sustainable Agriculture.

Hackett, S. C. Fisheries, Marine: Management and Policy, Retrieved June 18, 2010, from http://www.waterencyclopedia.com/En-Ge/Fisheries-Marine-Management- and-Policy.html

Hardin, Garrett . “The Tragedy of the Commons”, Science 162 (1968):1243-48

Reprinted in Baden and Noonan eds., Managing the Commons, 2^nd edition, Indiana University Press, 1998

Koster, P. (2007). Overfishing – A Global Disaster. Retrieved June 18, 2010, from http://overfishing.org/

Kromm, D. E. Ogalla Aquifer, Retrived June 18, 2010, from http://www.waterencyclopedia.com/Oc-Po/Ogallala- Aquifer.html