The Tragedy of the Commons and the Logic of

The first class of theoretical arguments that is commonly believed to speak for a general superiority of private over collective ownership forms relates to the well-known problem of individuals being incapable of coordinating their behaviour for the general benefit of their groups. It should therefore not come as a surprise that the following arguments for a general superiority of private property rights emphasise the negative aspects of owning a natural resource collectively.

First of all, it appears useful to approach the topic of collective coordina- tion failure by looking at the famous example of the tragedy of the commons. The origin of the term “tragedy of the commons” is to be found in the article by Garrett Hardin (1968), who analysed the problem of over-exploitation in collectively owned resources and concluded that the inevitable destiny of any such resource is its ruin.34 The ideas beyond these gloomy predictions can best

33_{This has also been noted by Dahlman (1980, p.74), who refers to Demsetz (1967) and Cheung}

(1970) as two of the main contributors to the understanding of private ownership being su- perior to collective ownership. One should also note that as Weitzman (1974b, pp.477-479) points out that a similar opinion seems to exist with respect to the desirability of different planning instruments. Among economists, as he claims, there often exists an unjustified preference towards using indirect planning instruments (prices) over direct ones (quanti- ties or quotas) to control resource extraction or other forms of economic activity.

34_{A similar reasoning can also be found in Alchian and Demsetz (1973, pp.19-20). It should}

further be noted that though the term “tragedy of the commons” was initially introduced by Hardin (1968), the basic idea that constitutes the heart of the article dates back to con- tributions that are much older. Ostrom (1990) and Hardin himself highlight that the basic thoughts that characterise Hardin’s argument can already be found in the works of Gordon (1954) and Lloyd (1977). However, Güth and Kliemt (2009) point out that similar ideas can be found in the works of Aristotle (Politics 1261b, 30-35/157). Further note that Hardin’s article reads very much like a pamphlet for birth control and against overpopulation.

be understood by referring to the following example.35

Consider a collectively owned pasture that is jointly utilised by a number of farmers from the same village community for the grazing of cows. To the community members, there are no external restrictions on the utilisation of the meadow. Therefore, as every farmer is allowed to put as many cows on the pasture as he wants, the only potential limitation to the farmers is the emer- gence of fixed marginal costs c that result from the grazing. However, as the capacity of the pasture is limited, the number of cows on the commons af- fects the individual amount of milk to be produced by every cow. Hence, by adding more cows to the commons, the amount of feed that is available for ev- ery cow will be reduced and therefore the production of milk will also decline. This shows itself in the properties of the production function: f(G)denotes the amount of milk to be produced ifGcows are grazed on the commons, whereas the capacity constraint implies positive but decreasing returns to production, so that _∂∂_Gf > 0 and ∂f

∂2G < 0. Hardin (1968) further continues by comparing the number of cows every farmer will put on the pasture under a system of private and of collective property rights. Under a private ownership regime in the spirit of Blackstone, there is just one farmer who decides on the number of cows to be grazed. Hence, the individual optimisation problem can be de- picted by maximising individual profits as the difference between the amount of milk produced by G cows and the costs the arise out of the grazing of G cows. As profits can be depicted as P = f(G)−c∗G and the farmer will choose the number of cows G to maximise his profits, the optimal quantity of cows to be grazed on the commons, G∗ will arise at the point where the marginal product _∂∂_Gf equals marginal costsc.

Now consider a system of collective ownership, where there is not one but a great number of different farmers. In this case, every farmer receives income in form of the milk produced by his cows on the commons. As before this is just f(G). Accordingly, the value of milk that is produced per cow is just the average product f(_GG). But how many animals will be added to the commons in

35_{In spite of the fact that a description of the tragedy of the commons is a simple textbook ex-}

ample, I still consider it important to apply it as a starting point in the present description. The reason for this is that we can already find the true reasons for the misinterpretation of a superiority of private ownership.

this scenario? Once again, every farmer will maximise his income by deciding on the number of cows to be put on the commons and therefore the farmers will continue to add cows to the pasture as long as the profits in the form of output produced are higher than individual costs. As before, the marginal costs of grazing a cow on the pasture arecand hence the farmer will add cows to the pasture as long as his revenues, or the average output of milk per cow are higher than the costs of the cow. Therefore the profit maximising number of cows on the commonsG+will be identified at the point where the marginal costs of grazingc equal the average product f(_QQ) and as the marginal product is decreasing inG, the number of cows on the commons will be higher under a system of collective ownership in relation to a system of private ownership.

Of course, the reason for this result is to be found in the divergence between the private and the social cost of economic activity. Under collective owner- ship, adding more cows to the commons also creates an externality which takes the form of a reduction in the output of milk through a reduction in feed on the pasture. This will also reduce the value of production for the other farmers by decreasing the output they will yield from their cows. Of course, the same ex- ternality is also present under private ownership, yet in the case of collective ownership it will not be internalised since there is no sole owner of the pas- ture. The cause for the absence of any internalisation roots in the simple fact that while the costs of producing another unit of milk are also absorbed by the other proprietors, the benefits of any production will be obtained individually. As every farmer is only interested in his individual profits, he will not include the social costs of his actions in his calculus and therefore too many cows will be added to the commons. This will destroy the plant surface and the com- mons, leading to the tragedy of the commons. This is the first argument which is believed to confirm the idea that private ownership will constitute a better way to manage a natural resource than collective ownership.

Note that there is also a second way how to display the problems associated with this form of collective ownership and this is displaying the problem in the form of a simple prisoners’ dilemma.36 While the tragedy of the commons

36_{In the description I will follow Ostrom (1990, pp.3-5), although the classical reference on this}

Cooperate Defect Cooperate 10,10 -1,11

Defect 11,-1 0,0

Table 2.1: The Tragedy of the Commons

has highlighted the basic problems of over-exploitation, the formalisation of the problem as a prisoners dilemma offers the change to stress the aspects that are responsible for the individual farmers not being able to coordinate their behaviour for the benefit of their group. As before, consider a pasture that is owned collectively by a group of peasants, but for the sake of simplicity, imagine the situation as a simple two person game. As the capacity constraint is still in place, there is an upper limit to the number of cows to be grazed and fed well on the commons in every period. To account for this upper limit, the optimal number of cows on the commons is depicted as G. Further, assume that if both farmers would come to an agreement, they would decide that each of them will add only the number of G₂ cows to the commons.

Accordingly, in the present example each farmer has two choices. If he wants to cooperate with his co-owner, the farmer will limit himself to adding only G₂ cows to the pasture. However, there is also an alternative to cooperation; the farmer can play the “defect” strategy, whereby he will add the number of cows to the commons that maximises his individual welfare.37 Table 1 displays the payoff matrix for this game.

Given the case that both farmers cooperate and limit the number of cows to G₂, they will both yield an individual profit of 10, while if they both defect from the agreement by putting more than G₂ cows on the commons, both yield zero profits. So far cooperation dominates the defect strategy. However, in this setup of the classical prisoners dilemma, the problem arises in the case of one farmer cooperating by sticking to G₂ while the other one plays the defect

37_{To keep things simple, I will assume that this number will be higher than} G

strategy and expands grazing beyond G₂. In this case, the defector can increase his profits at the expense of the cooperator and hence he will yield a profit of 11 while the cooperator’s profits are driven down to -1. It is straightforward to note that the dominant strategy in this setup is for every farmer to play the defect strategy, leading to a Pareto inferior outcome, since both farmers would initially prefer the Cooperate-Cooperate strategy.38

Once again one can relate this insight to the presumed general efficiency of private ownership structures. While under private ownership of land, agents do not have to negotiate on the number of cows to put on the commons and since individual enrichment at the cost of others is also not possible, the opti- mal number of cows G will be put on the commons. Once again, this is not the case under the described regime of collective ownership. Here, utility max- imisation using communal rights creates severe problems, since the costs of individual behaviour are also shared by the co-owners of the resource, again leading to the well-known free-rider problem. This has also been addressed by Alchian and Demsetz (1973, p.21) who state that

“the communal right system raises transaction costs by creating a free rider problem.”

Finally, a third interpretation of the basic problem can be displayed by refer- ring to Alchian and Demsetz (1973, p.22) who state that

“[a]ll private owners have strong incentives to use their property rights in the most valuable way”.

Of course this understanding is closely linked to the work of Olson (1965b). Assume that in the described situation, there are not only costs that relate di- rectly to the number of cows on the commons, but also the necessity to main- tain the functioning of the pasture through the building of fences or the cutting of trees. Olson though in a more general context emphasises that though there

38_{Remember that the setup of the prisoners’ dilemma as a non-cooperative game with com-}

plete information prevents the possibility of both communication and binding agreements between the farmers. Further, as this game takes place in an environment of perfect infor- mation, it is presumed that every farmer knows both the full structure of the game and the structure of the payoff matrix.

might be a common aim to maintain the commons, this might not be enough to motivate the farmers to contribute a sufficiently high amount of work or money. As long as no one can be excluded from obtaining the benefits of a collective resource, no farmer will have an incentive to contribute voluntarily to the provision of the good or in the present case to the maintenance of the pasture. In the present example, sticking to an upper level of resource extrac- tion could also be interpreted as a form of investment in the state of the natural resource. Once again if there is no way to exclude other farmers from exploit- ing the resource, a farmer who decides to invest by sticking to the agreement will know that the fruits of his saving efforts will not be exclusively obtained by himself but also by the co-owning farmers.39 But if no exclusion will take place, no farmer will have the incentive to save and invest in the maintenance of the resource. Once again, as cooperation between the farmers cannot be fostered, no agent can convincingly commit to cooperate and invest and there- fore both farmers will play the defect strategy and realise a Pareto inferior equilibrium. Hence, in this example the presumed nonexistence of exclusion under collective ownership in contrast to the possibility to exclude under pri- vate ownership, is believed to contribute to the general inferiority of collective ownership types.

It is possible to recapitulate this first group of arguments on the superior- ity of private ownership as follows and although all of the described prob- lems centred around the free-rider problem that emerges out of the divergence between private and social costs, its interpretations are slightly different. At first, the analysed form of collective ownership has been associated with the tragedy of the commons that emerges out of individual profit maximisation and causes over-exploitation of a natural resource. Apparently, the basic cause of this problem is the absence of a market for the externality. Second, the inter- pretation of the problem as a prisoners dilemma has offered the chance to take a closer look at the roots of coordination failure and this will lead to the realisa-

39_{This reasoning of course also relates to the prisoners’ dilemma depicted above. If one in-}

terprets the capacity constraint in a way that grazing more then G₂ cows on the commons will destroy the plant surface or the fencing and therefore the maintenance of the natural resource is in trouble. Hence, sticking to the agreement can be interpreted as a saving effort of a farmer who wants to invest in the maintenance of the pasture in consecutive periods.

tion of an equilibrium that is inferior to a private ownership solution. Finally, the presumed nonexistence of any means to exclude farmers from the use of the resource, has shed light on another negative aspect of collective ownership, which relates to the incentives of maintaining the state of the natural resource.