|Imagine four herdsmen who live around the edges of a finite pasture. Each owns a flock of three animals, but shares ownership of the pasture (the “commons”) with the other herdsmen. As a livestock owner, each herdsman enjoys 100% of the benefits of each animal (wool, fur, leather, milk, meat, manure, etc.), but since everybody owns the commons collectively, each animal’s costs (urine, grass consumption, foot traffic, etc.) is spread out equally between the four herdsmen.
In our hypothetical example, the commons can only support 24 animals. If the animal population grows any larger, the grass will not grow back fast enough to sustain the flock. The commons will die out, the animals will starve, and the herdsmen will lose their livelihood.
Now these herdsmen are no fools, so they size up the situation in cost/benefit terms. As long as the benefit a herdsman gets from adding an animal to his flock is greater than the cost he bears, then it makes sense to add that animal to his flock. The smartest herdsman jumps on the opportunity.
|The herdsman in the upper right corner (being an entrepreneurial fellow) adds one animal to his flock. He keeps one animal’s worth of proceeds, but the increased strain on the commons is spread out equally onto all four herders. He has come out ahead.
It isn’t long before the other three herdsmen realize what the rational course of action is.
|The herdsman in the upper left corner hustles down to the stockyard and brings home another animal. He reaps the full benefits, and just like the first herdsman he dumps 3/4 of the cost onto his neighbors.|
|The last two herdsmen are on the ball too, so each adds an animal to his flock. Each receives all of the benefits of his new animal, and imposes 3/4 of the cost on his neighbors.
By now you can see where this is going.
|Before long each herdsman has a flock of six animals. As explained in the introduction, the commons can still support this total herd of 24, but adding one more animal will start a downward slide.
Sadly that’s exactly what will happen, thanks to the perverse system of incentives at work here. Each herdsman still has an incentive to add animals to his flock, because he reaps all of the benefits but bears only 1/4 of the costs. Each will behave rationally, rushing to “get all he can” while there’s still something left to get.
|Predictably, each herdsman has frantically increased the size of his flock to squeeze every last bit of benefit out of the commons.
What happens if an altruistic herdsman contents himself with, say, six animals? Why, his neighbors will keep imposing new costs on him while his income remains unchanged, of course. He’ll be the first to lose his livelihood.
This is the tragedy that befalls the commons when individuals keep all of the benefits of an activity that uses a finite resource, but they bear only a portion of the costs.
So what’s the logical solution?
|Rewind to the beginning. Each herdsman has three animals, and the pasture can support 24. Instead of sharing ownership of the commons, the herdsmen decide to split the land between them.|
|Each herdsman fences in his property, creating four identical lots. The entire pasture can still support 24 animals, and each herdsman reaps all of the benefits from his animals, but each also bears all of the costs.
Since each lot is able to sustain six animals before it degrades, each herdsman will behave rationally and buy three more animals.
|Now that each herdsman has six animals (for a total of 24 in the pasture), none of them has any incentive to add a seventh. If someone does, his property will begin to degrade and he will experience more costs than benefits. His neighbors won’t bear his costs, and they will prosper. A foolish herdsman who depletes his lot will go bankrupt, and someone else will buy his land and use it wisely.
Thanks to the concept of private property, each owner has a huge incentive to maximize his benefits while controlling his costs to avoid using up his finite resources. Equilibrium has been reached and each herdsman’s property produces at its maximum efficiency.
The tragedy of the commons has been averted.
5/14/2012 Update: Well, well, well. Do you see something familiar in this video, starting at roughly 2:15?
Thanks for stealing my imagery, John.