As the population grows, the # of sheep grows. The amount of land is fixed, the grass begins to disappear from overgrazing. The private incentives (using the land for free) outweigh the social incentives (using it carefully). Result: people can no longer raise sheep
PUBLIC GOODS AND COMMON RESOURCES 14 The Tragedy of the CommonsThe tragedy is due to an externality: Allowing one’s flock to graze on the common land reduces its quality for other familiesPeople neglect this external cost, resulting in overuse of land
What could the townspeople (or their government) have done to prevent the tragedy? Try to think of two or three options. A C T I V E L E A R N I N G A C T I V E L E A R N I N G 2 2 Policy options for common Policy options for common resources resources 15
Impose a corrective tax on the use of the land to internalize the externality Regulate use of the land – command and control approach Auction off permits allowing the use of the land Divide the land, sell the lots to individual families, each family will have an incentive to not overgraze A C T I V E L E A R N I N G A C T I V E L E A R N I N G 2 2 Answers Answers 16
PUBLIC GOODS AND COMMON RESOURCES 17 Policy Options to Prevent Overconsumption of Common Resources Regulate use of the resource Impose a corrective tax to internalize externality Ex. Hunting and fishing licenses, entrance fees for congested national parks Auction off permits allows use of the resource Ex. Spectrum auctions by the US FCC If the resource is land, convert to a private good by dividing and selling parcels to individuals
PUBLIC GOODS AND COMMON RESOURCES 18 Some Important Common Resources Clean air and water Congested roads Fish, whales, bison, other wildlife
PUBLIC GOODS AND COMMON RESOURCES 19 CASE STUDY: “You’ve Got Spam!” Some firms use spam emails to advertise their products. Spam is not excludable: firms cannot be prevented from spamming Spam is rival, as more companies use spam, it becomes less effective Thus, spam is a common resources Like most common resources, spam is overused which is why we get so much of it “Spam” email is named after everyone’s favorite delicacy.
PUBLIC GOODS AND COMMON RESOURCES 20 Economic View of Individual Liberty and Cap and Trade Recall Coase Theorem: If private parties can costlessly
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- Public Good, Market failure, Externality