Lesson 2: The tragedy of the commons

Question 1

State utility maximizing issue

Answer 1

Difficult to define an issue: What utility and for whom? Jeremy Bentham: The greatest good for the greatest number Adam Smith: Freedom to act in own self interest. Markets and the invisible hand do the rest.

Question 2

How do individuals maximize utility?

Answer 2

Maximize utility by obtaining goods Think Maslow’s hierarchy of needs

Question 3

Critique of Bentham

Answer 3

Impossible to do the greatest good for the greatest number: 1) Interpersonal utility comparison is not possible => Cannot quantify and cannot compare different measures 2) We can mathematically only maximize for one variable at a time

Question 4

Critique of Bentham

Answer 4

Impossible to do the greatest good for the greatest number: 1) Interpersonal utility comparison is not possible => Cannot quantify and cannot compare different measures 2) We can mathematically only maximize for one variable at a time

Question 5

What is the tragedy of the commons?

Answer 5

Benefits are private but costs are socialized (socially suboptimal outcome) => Example of a pasture, where herdsmen have to decide whether to add an extra cow or not => Adding a cow is a rational action

Question 6

Commons: Utility of adding a cow

Answer 6

U=1-1/n Net benefit of adding one cow, normalized to 1: More cows added, the greater the benefit.

Question 7

Commons: Cost of adding one cow

Answer 7

Overgrazing: -1/n n = number of herdsmen

Question 8

Commons: Logic of a rational actor

Answer 8

U(add)=1-1/n>U(not add)=0 Utility of adding an extra cow is higher than not adding one

Question 9

Commons: How does the utility increase in this function?

Answer 9

U/n = 1/(n^2) The larger the community is the worse the tragedy is

Question 10

Typology of goods: Terms

Answer 10

Excludability: exclude others from consuming the good Rivalry: adding another consumer diminishes the amount left for other consumers

Question 11

Typology of goods: Matrix

Answer 11

Examples: • Peace, Econ. Growth: public good • Shoes, beer, suits, car: private goods • EU, indoor gym with lots of services offered: club good • Fishing/ocean, Grassland, Mine: common good

Question 12

Typology of goods: Terms

Answer 12

k

Question 13

Typology of goods: Matrix

Answer 13

Excludability: exclude others from consuming the good Rivalry: adding another consumer diminishes the amount left for other consumers

Question 14

Typology of goods

Answer 14

k

Question 15

Typology of goods

Answer 15

[Insert image]

Question 16

Typology of goods

Answer 16

[Insert image]

Question 17

Commons: What is a strategic situation?

Answer 17

One where the outcome depends not only on own actions, but also on those of others

Question 18

Tragedy of the commons in game theoretic terms

Answer 18

Image

Question 19

Tragedy of the commons in game theoretic terms

Answer 19

Image

Question 20

Nash Equilibrium

Answer 20

1) The set of actions that constitute simultaneous best responses

Question 21

Pareto Optimum

Answer 21

It is not possible to make at least one actor better off without making another actor worse off

Question 22

Pareto Optimum

Answer 22

It is not possible to make at least one actor better off without making another actor worse off

Question 23

How can we solve public goods/ common pool problems?

Answer 23

Through state intervention: -Privatize: Establish property rights - Allocation principle (merit, rotation, lottery) - Institutions: Monitor and enforce (e.g. pollution tax) Or through social norms: - Reciprocity - Altruism

Question 24

RQ: 1) What is the tragedy of the commons?

Answer 24

In the common pool/public goods context: Depletion of resources due to individually rational behavior

Question 25

RQ: 2) How can we define common pool resources, public goods, club goods, and private goods?

Answer 25

– Use distinctions between excludability and rivalry – Define based on presence of these characteristics

Question 26

RQ: 3) Which game-theoretic model can we use to study public goods/common pool problems?

Answer 26

Prisoner’s dilemma game

Question 27

Tragedy of the commons in game theoretic terms

Answer 27

Image NE is pollute/pollute, PO is not pollute/not pollute

Question 28

Nash Equilibrium

Answer 28

1) The set of actions that constitute simultaneous best responses (maximize own utility given the utility of the other actor) 2) Outcome in which no player has an incentive to unilaterally deviate

Question 29

Pareto Optimum

Answer 29

Property of an outcome: It is not possible to make at least one actor better off without making another actor worse off

Question 30

How can we solve public goods/ common pool problems?

Answer 30

Through state intervention: -Privatize: Establish property rights - Allocation principle (merit, rotation, lottery) - Institutions: Monitor and enforce (e.g. pollution tax) Or through social norms

Question 31

RQ: 3) Which game-theoretic model can we use to study public goods/common pool problems?

Answer 31

Prisoner’s dilemma game

Question 32

When an outcome only hinges on what you do as a singular actor

Answer 32

Decision-theoretic problem

Question 33

Pareto improvement

Answer 33

When the situation/ utility of two or more actors is improved

Question 34

Issue with state intervention in solving public goods problems?

Answer 34

Too costly

Question 35

Social norms to solve public goods problems

Answer 35

- Reciprocity (conditional cooperation → I am willing to contribute, if you do so as well) - Altruism (own welfare depends positively on other’s welfare) → Not costly