Micro 21 - Market Failure - Tragedy of the Commons Flashcards
Non-rivalrous?
This means that one person’s consumption does not diminish the quantity or quality of another’s consumption.
Non-excludability?
This means that once the good is provided to one person nobody else can be prevented from consuming - light!
Common Resource?
Goods that are “nonexcludable” but “rival”. Unlike public-goods, common resources get depleted as more people use them.
–> E.g, when fishing for tuna in the open sea, you cannot exclude anyone else from performing the same activity, as nobody has property rights to them. However, by removing one tuna fish from the ocean, you simultaneously leave behind one less tuna for every other fisherman. This proves that the good is rivalous.
Meaning of the Tragedy of Commons?
A situation where there is an overuse or undermaintanenance of a common resource because utility-maximizing individuals act in their own interest and deplete “common” resources for their own private benefit. They have no interest in the social costs/impacts.
-> These “common” resources are normally
overproduced/consumed.
Why is there complete MKT failure with Public goods?
Public goods are goods that are both non-excludable and non-rival. The classic example is a lighthouse.
Due to the characteristic of non-excludability, where you cannot prevent someone from freely using a good once provided, there is no financial incentive for private businesses to provide public goods, as they cannot charge for their use and make a profit.
As a result, the free market would not provide these goods = a missing market or complete market failure. This is an example of a misallocation of resources and a market failure.
Why does the Tragedy of the Commons occur?
Caused mainly by a lack of property rights/ private ownership, causing a lack of monitorisation of supply.
Furthermore, the fisherman, on an individual basis, aren’t incentivized to harvest less as they are all in competition/ rivalry with each other, meaning that if one fisherman was to slow down his rate of capture then he would be working to the favor of another fisherman, who now would be catching at a higher rate.
Solution for the Tragedy of Commons?
- Cultural reform (promoting changes in what is deemed appropriate and socially accepted, e.g. through adverts).
- Creating property rights ( Allocating property rights will encourage the appointed owners to protect the resource by allowing the owners to sue those who exploit the resource.
Example 1: The National Rivers Authority, now part of the Environment Agency, was created with powers to act ‘as if’ it owned the UK’s rivers. This allowed it to police the rivers and sue polluters and opportunists, such as poachers.)
Evaluation of Property right?
Eval:
+ By offering these permits, fisherman will not overfish and destroy the fishery.
+ Fisherman are incentivized to ensure that others also abiding by their limits.
+ Overtime, this allows the fishing stock to recover.
+ This reduces the overproduction/consumption of this resource and the market failure.
- The government may not have the ability to extend property rights, e.g., how would the British government prevent Brazilian firms from destroying the rainforests which leads to global warming and flooding in the UK?
- For the rights to live-stock, for example, will require multi country agreements as stock may not remain in one territory, and instead could leave to other nations. These agreements are slow and difficult to achieve, with every adding country.
