Common resources like public goods, are not excludable. They are available free of charge to anyone who wants to use them. Common resources are, however, rival in consumptions: One person’s use of the common resource reduces other people’s ability to use it. Thus, common resources give rise to a new problem. Once the good is provided policymakers need to be concerned about how much it issued. This problem is best understood from the classic parable called the Tragedy of the Commons.
The Tragedy of the commons:
A parallel that illustrates why common resources get used more than is desirable from the standpoint of society as a whole.
Consider life in a small medieval town. Of the many economic activities that take place in the town one of the most important is raising sheep. Many of the families own flocks of sheep and support themselves by selling the sheep’s wool, which is used to make clothing.
As our story begins, the sheep spend much of their grazing on the land surrounding the town, called the Town Common. No family owns the land. Instead, the town residents own the land collectively and all the residents are allowed to graze their sheep on it. Collective ownership works well and is plentiful. As long as everyone can get all the good grazing land they want, the Town Common is not rival in consumption and allowing residents’ sheep to graze for free causes no problems . Everyone in town is happy.
As the years pass the population of the town grows, and so does the number of sheep grazing on the Town Common. With a growing number of sheep and a fixed amount of land the land starts to lose its ability to replenish itself. Eventually the land is grazed so heavily that it becomes barren. With no grass left on the Town Common raising sheep is impossible and the town’s once prosperous wool industry disappears. Many families lose their source of livelihood.
What causes the tragedy ? Why do the shepherds allow the sheep population to grow so large that it destroys the Town common? The reason is that social and private incentives differ. Avoiding the destruction of the grazing land depends on the collective action of the shepherds. If the shepherds acted together they could reduce the sheep population to a size that the Town Common can support. Yet no single family has an incentive to reduce the size of its own flock because each flock represents only a small part of the problem.
In essence the Tragedy of the Commons arises because of an externality. When one family’s flock grazes the common land, it reduces the quality of the land available for other families. Because people neglect this negative externality when deciding how many sheep to own, the result is an excessive number of sheep.
If the tragedy had been foreseen the town could have solved the problems in various ways . It could have regulated the number of sheep in each family’s flock internalized, externally by taxing sheep, or auction off a limited number of sheep grazing permits. That is medieval town could have dealt with the problem of overgrazing in the way that modern society deals with the problem of pollution.
In the case of land however, there is a simpler solution: The town can divide up the land among town families. Each family can enclose its parcel of land with a fence and then protect it from excessive grazing. In this way the land becomes a private good rather than a common resource. This outcome in fact occurred during the enclosure movement in England in the 17th century.
The Tragedy of the Commons is a story with the general lesson: When one person uses a common resource he or she diminishes other people’s enjoyment of it. Because of this negative externality common resources tend to be used excessively. The government as solve the problem by reducing use of the common resources through regulation or taxes. Alternatively the governments can some times turn the common resources into private goods.
Source: Principles of Economics