Tragedy of Commons - Merged

Microeconomic Theory:
Some Examples
Dr. Gopal Sharan Parashari

IIT Dharwad
THE DIFFERENT KINDS OF GOODS
•When thinking about the various goods

in the economy, it is useful to group
them according to two characteristics:
• Is the good excludable?
• Is the good rival?
• Excludability
• Excludability refers to the property of a good
whereby a person can be prevented from
using it.
• Rivalry
• Rivalry refers to the property of a good
whereby one person’s use diminishes other
people’s use.
Classifying Goods and Resources
•Examples of RIVAL items are:

▪ The services of Brinks Security
▪ Fish both in ocean and in a fish farm
▪ A seat at a live concert
•Examples of NON-RIVAL items are:
▪ The protection provided by a city police department
▪ A broadcast television signal
•Four Types of Goods

1. Private Goods
2. Public Goods
3. Common Resources
4. Natural Monopolies
• A Four-Fold Classification
• Private Good
• A good or service that can be consumed by only one
person at a time and only by those people who have
bought it or own it.
• Public Good
• A good or service that can be consumed simultaneously
by everyone and from which no one can be excluded.
• Common Resource
• A resource that is non-excludable and rival—can be
used only once but no one can be prevented from using
what is available.
• Natural Monopoly
• A good or service that is non-rival but excludable—can
be produced at zero marginal cost.
• Private Goods
• Are both excludable and rival.
• Public Goods
• Are neither excludable nor rival.
• Common Resources
• Are rival but not excludable.
• Natural Monopolies
• Are excludable but not rival.
•.
Common Goods
COMMON RESOURCES OR GOODS
• Common resources, like public goods, are not excludable.
• They are available free of charge to anyone who wishes to use them.
• Common resources are rival goods because one person’s use of the
common resource reduces other people’s use.
• Definition: goods that are non-excludable but rivalrous (they can be
used up)
• Examples: fish stocks in international waters, common grazing pasture
Some Important Common Resources/Goods
•Clean air and water

•Congested roads
•Fish, whales, and other wildlife
Tragedy of the Commons
•The Tragedy of the Commons is a parable that
illustrates why common resources get used more
than is desirable from the standpoint of society as a
whole.
•Common resources tend to be used excessively
when individuals are not charged for their usage.
•This is similar to a negative externality.
“Tragedy of the Commons”
• Situation in which two or more people are using a
common resource and exploit it beyond the level
that is best for the group as a whole
• Common goods are often depleted due to overuse
(the “tragedy of the commons”):
• Individually rational choices lead to collectively
suboptimal outcomes (just as in prisoner’s
dilemma)
“Tragedy of the Commons”
• Overfishing
• Excessive deforestation of the amazon jungle
• Extracting oil too fast from a common reservoir
Tragedy of the Commons: The extension of
the woolly mammoth
Tragedy of the Commons: The extension of
the woolly mammoth
Tragedy of the Commons: The global climate
change
• the most important current example of the tragedy of the commons is
global climate change.
• Since the beginning of the industrial revolution, atmospheric
concentrations of carbon dioxide have increased by nearly 30%,
methane concentrations have more than doubled, and nitrous oxide
concentrations have risen by about 15%.
• During that same period, the average surface temperature of the
planet has increased by to 1 degree Fahrenheit and sea level has risen
4–8 inches.
• the only way to solve this tragedy of the commons is through
coordinated action that limits behavior, such as was proposed with the
Kyoto Accord.
Tragedy of the Commons: More examples
Coffee Consumption
While a simple cup of coffee might seem
harmless, coffee consumption is a prime example
of the tragedy of the commons. Coffee plants are
a naturally occurring shared resource, but
overconsumption has led to habitat loss
endangering 60 percent of the plants' species—
including the most commonly brewed Arabica
coffee.
Overfishing
As the global population continues to rise, the food supply
needs to increase just as quickly. However, overhunting and
overfishing have the potential to push many species into
extinction. For example, overfishing of the Pacific bluefin tuna
has caused an all-time population low of approximately three
percent of their original population. This not only endangers
the Pacific bluefin tuna, but also risks further marine ecosystem
endangerment as a result.
Fast Fashion
Overproduction by fashion brands has created extreme
product surplus to the point that luxury brand Burberry
burnt $37.8 million worth of its 2018 season’s leftovers to
avoid offering a discount on unsold wares. Furthermore,
as new trends emerge rapidly within social networks on
the Internet and social media, consumers are constantly
purchasing new clothing items and disposing of old, out-
of-trend items that ultimately end up in landfills and
Traffic Congestion
Traffic congestion is one of the best-known modern examples
of the tragedy of the commons. According to a study by
the Harvard School of Public Health, air pollution from traffic
congestion in urban areas contributes to more than 2,200
premature deaths annually in the United States alone. As
more people decide that roads and highways are the fastest
way to travel to work, more cars end up on the roads,
ultimately slowing down traffic and polluting the air.
Groundwater Use
In the United States, groundwater is the source of drinking
water for about half the population, and roughly 50 billion
gallons are used each day for agriculture. Because of this,
groundwater supply is decreasing faster than it can be
replenished. In drought-prone areas, the risk for water
shortage is high and restrictions are often put in place to
mitigate it. Some individuals, however, ignore water
restrictions and the supply ultimately becomes smaller for
everyone.
COVID-19
The Tragedy of the Commons can also be applied to the COVID-19
pandemic. In its early days, people were generally wary of mixing
with anyone outside their immediate family, leaving their homes less
and working from home. However, another result of the pandemic
was that people began to stock up on food and utilities. People likely
assumed that everyone else would stock up as well and so the only
solution was to preempt this scenario and stockpile food before the
next person could. Again, people were thinking logically, but not
collectively, and herein lies the relevance of the Tragedy of the
Commons. Individuals took advantage of opportunities that
Hardin, G. (1968, The Tragedy of the Commons, .
Strategic usage of a commonly owned resource by ( 1) economic

agents.
A Commons: a nite, exhaustible resource available to many individ-

uals (environment, international waters. . . ).
Tragedy: overuse of the Commons compared to Pareto optimality.

Suppose that we have a common property resource of size 0.
Each individual = 1 can withdraw a nonnegative amount for

=
consumption, provided that = =1 .
In the event that they attempt to consume in excess of what is available,

we assume that the total amount is simply split between them, that is
each individual ends up consuming .
When total consumption is less than , then the leftover amount, ,

form the resource for the second period.
Period 1: Consumption by agent = 1 is:
=
Thus total consumption in period 1: = =1
If , then each consumer consumes ;
If , then forms period 2 resource base
Utility from consumption for individual : = log( ) + log(second

period)
(1) Find the unique symmetric NE of this game.
Assume that player conjectures that the others consume an amount
each in period 1, which implies that in period 2, consumption is:
( 1)
Period 1: Each agent maximizes:

( 1)
max log + log
FOC:
1 1
=0
( 1)
which is equivalent to:
( 1)
=
2
Symmetric equilibrium: 1 = = = . Thus,
=
+1
and utility is for each :
( +1)
= log + log
+1
= log + log
+1 ( + 1)
2
= log
( + 1)2
(2) Calculate the social optimum of this game.
The planner maximizes the sum of utilities, i.e.
=
=1
max log 1 + + log + log
1
FOC for :
1
=
=0
=1
that is:
=
=
=1
Symmetry: 1 = = = . Thus,
=
Therefore:
=
2
and for each rm
= log + log
= log + log
2 2
2
= log
4 2
Tragedy since:
( + 1) = = 2
i.e. overuse of in the NE.
Also
for 2
Remark: As becomes large, a vanishingly small amount of the re-

source reaches the second period.

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Microeconomic Theory:

Dr. Gopal Sharan Parashari

•When thinking about the various goods

•Examples of RIVAL items are:

•Four Types of Goods

•Clean air and water

Strategic usage of a commonly owned resource by ( 1) economic

A Commons: a nite, exhaustible resource available to many individ-

Tragedy: overuse of the Commons compared to Pareto optimality.

Each individual = 1 can withdraw a nonnegative amount for

In the event that they attempt to consume in excess of what is available,

When total consumption is less than , then the leftover amount, ,

If , then each consumer consumes ;

If , then forms period 2 resource base

Utility from consumption for individual : = log( ) + log(second

Period 1: Each agent maximizes:

Remark: As becomes large, a vanishingly small amount of the re-

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Tragedy of Commons - Merged

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Tragedy of Commons - Merged

Uploaded by

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Original Title

Copyright

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Tragedy of Commons - Merged

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Microeconomic Theory:

Dr. Gopal Sharan Parashari

•When thinking about the various goods

•Examples of RIVAL items are:

•Four Types of Goods

•Clean air and water

Strategic usage of a commonly owned resource by ( 1) economic

A Commons: a nite, exhaustible resource available to many individ-

Tragedy: overuse of the Commons compared to Pareto optimality.

Each individual = 1 can withdraw a nonnegative amount for

In the event that they attempt to consume in excess of what is available,

When total consumption is less than , then the leftover amount, ,

If , then each consumer consumes ;

If , then forms period 2 resource base

Utility from consumption for individual : = log( ) + log(second

Period 1: Each agent maximizes:

Remark: As becomes large, a vanishingly small amount of the re-

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A Commons: a nite, exhaustible resource available to many individ-