Market Failure: Tragedy of the Commons (AQA A Level Economics)

• Common pool (access) resources are natural resources over which no private ownership has been established. They are non-excludable but rivalrous in consumption
   
• Examples of common pool resources include
  • Oceans (especially international waters)
  • Natural forests and rainforests
  • Communal grazing land
  • Water sources such as rivers
     

• The tragedy of the commons (as explained by Garret Hardin in 1968) occurs when common pool resources are used in production in an unsustainable way
  • Left to the free market, there is no private ownership over these resources, as it is costly and inefficient to find ways to exclude other producers 

• • This creates negative externalities of production and consumption 
    • There is no incentive for firms to reduce production levels as they seek to maximise profits. If an individual producer cut back production, other firms may then enter the market, causing them to lose out. Each private producer has the self-interest to keep exploiting resources
    • There is also no incentive for consumers to reduce consumption levels. If an individual consumer cuts back on consumption, other consumers will use the resource. E.g Excessive consumption of fish from a lake will deplete fish stock, exploiting resource

• • The external costs of production and consumption often include pollution, environmental damage and resource depletion, which prevents future generations from benefiting in the same way. This results in partial market failure

• The Darién Gap is in Panama and is located on the border with Columbia
• This area is one of the most impregnable rainforests on the planet and is inhabited by indigenous tribes, drug traffickers, and para-military organisations

Diagram: Map of the Darien Gap in South America

The Darién Gap is a common pool resource

Background

• The Darién Gap is the only area where the 19,000km Pan American highway from Ushuaia (Argentina) to Prudhoe Bay (Alaska) is interrupted: a 62-mile gap
• Illegal logging has been steadily increasing
• The most valuable resource in the forest is the Rosewood Cocobolo tree which sells in Panama for $4,000 per m³ but in China for $12,000 per m³: this scarce resource is rapidly being depleted
• Loggers use the river system to penetrate deep into the forest
• Once the forest canopy is thinner, they bring in bulldozers and create illegal roads to speed up the extraction
• When they have left, palm oil entrepreneurs move in and plant palm oil trees
• Despite laws in place to protect the forest, there is no enforcement and corruption is common
• Hundreds of tons are shipped each year to China
• The indigenous tribes are waging war with the illegal loggers and there are frequently violent clashes and deaths

Solutions

• Several solutions have already been attempted by the indigenous community, including
  • Collective self-governance of the area
  • Forest mapping using drones
  • Using drones to gather video footage of the identity of the illegal loggers
  • Appeal  to the government by the three indigenous tribes for legal ownership rights to the land
  • Appealing for the creation and enforcement of international agreements on the sale of illegal timber
     

An Evaluation of the Solutions used to Address the Tragedy of the Commons in the Darién Gap

Solution	Advantages	Disadvantages
Collective self-governance The tribes can come together and attempt to govern the land which they consider to be their homeland. They can work together to stop illegal activity	Working together can provide a common purpose and build a community The tribes understand the land best and know how and where to best restrict the activities of the illegal loggers This activity can provide employment within the tribes The resources can be protected and used in a sustainable way	The illegal loggers are violent and armed with automatic weapons so violence is almost a certainty The tribes have fewer resources (weapons, machinery, and money) than the illegal loggers, so struggle to limit their activity Attempts to slow down extraction may actually increase the pace of extraction as the illegal loggers are feeling more pressure to get the job done
Appeal to the government for legal ownership rights of tribal land So far, about 40% of the land has been granted to the tribes	The owners are legally entitled to defend their land Legal rights of property ownership can be enforced by law Illegal logging is now theft and the tribes have hired lawyers to prosecute individuals and firms involved Some illegal loggers have been imprisoned	Corruption remains high. The profits from illegal logging are so high that firms and individuals involved easily pay bribes to officials who are meant to represent the legal process The illegal loggers ignore the land owners and violent clashes continue to occur
International Agreements A global solution, enforceable by law helps to reduce illegal behaviour	Global agreements to protect indigenous flora and fauna exist In 2018, Interpol seized 200 m3 of wood headed for Hong Kong, which were violating these agreements	Loggers up their game and avoid detection Not all countries follow the law and in this case, China actively ignore it so as to get their hands on this resource It is only really effective when all countries sign up for it and when the law enforcement agencies in each country are active and free from corruption

• Property rights of common access resources are issued to define the ownership of a resource and set out how they can be used
  • If common land is given over to private ownership, the private owner has a strong incentive to manage the resource and take care of it for future use

Example of Property Rights to Resolve Tragedy of the Commons

Common access resource	Property rights issued	Internalise the externality	Reduce market failure
Producer uses trees in a forest to supply timber Forest is at risk of over exploitation	Firm issued property rights by the government Firm now owns part of a forest	Negative externalities are internalised. The producer will be directly impacted and will pay for the over-exploitation of resources Producer has incentive not to over-exploit the trees or deplete resource and manages resource for continued future use	Quantity produced should be reduced to a socially optimum level Allocative efficiency in the market

• Allocating property rights to manage common resources poses challenges of equity, divisibility and enforcement
   

Problems with Allocating Property Rights

Problem	Explanation
Equity	Deciding who receives the property rights is difficult, as it grants one group significant power to make decisions about use of resource E.g If a local community is allocated property rights over a forest/lake, they hold all decision-making power. A producer may have to compensate the other for access to the common resource It might be preferable to assign property rights to local agencies or governments to ensure fairness
Cost of enforcement	Enforcing and regulating the use of property rights of common access resources tends to be expensive to monitor E.g Enforcing property rights over fishing grounds in large oceans / lakes poses challenges. It may be easy for fishing vessels to avoid the regulations
Divisibility	Some common access resources pose challenges due to their indivisibility, as they are not easily divided among users  E.g Air is intangible, which complicates the assignment and monitoring of property rights