101-22_07

# 101-22_07 - 1 Econ 101 Lecture 22 The Tragedy of the...

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1 Econ 101 Lecture 22 The Tragedy of the Commons Example 22.1 . A village has five residents, each of whom has accumulated savings of \$100. Each villager has two investment opportunities: 1. Buy government bond for \$100 that pays 12% interest per year. 2. Buy a year-old steer for \$100, send it onto the commons to graze, then sell it after one year for a price as given in the table: The Relationship Between Herd Size, Selling Price, and Profit per Steer Number of steers Price per 2-year- Profit per on the commons old steer (\$) steer (\$) 1 120 20 2** 116 16 3 114 14 4* 112 12 5 110 10 If each person decides individually how to invest, how many steers will be sent onto the commons? Send steer if and only if price of 2-year-old steer is at least 112 => send 4 steers. Total village income = 12 + 4(12) = 60 (bond) (steers) Example 22.2 . In the preceding example, what is the socially optimal number of steers? Number of steers Price per 2-year- Profit per on the commons old steer (\$) steer (\$) 1 120 20 2** 116 16 3 114 14 4* 112 12 5 110 10 Socially optimal investment: Send another steer only if the value of the herd increases by at least 12. Thus we should send a second steer but not a third. Total income = \$32 + \$36 = \$68 The problem with private decisions is that no individual has any incentive to take into account that an extra steer will eat grass that otherwise would have been available to the steers already on the commons. Example 22.3 . Sam and Stan are identical twins with a craving for chocolate malted milkshakes, and have agreed to share one. If each has a straw and each knows that the other is self-interested, will the rate at which they consume the milkshake be optimal? Each knows that any part of the milkshake he doesn't drink will be drunk by the other. The result is that each will consume at a faster rate than he would if he had half the shake all to himself.

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2 Examples of Tragedies of the Commons •Harvesting timber on public land: each tree cutter knows that a tree not harvested this year will be bigger, and hence more
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101-22_07 - 1 Econ 101 Lecture 22 The Tragedy of the...

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