Thursday, August 4, 2011

Negative Externalities and the Tragedy of the Commons

. Thursday, August 4, 2011

In a classic example of a tragedy of the commons, a field is used by several farmers to graze their cattle. None of the farmers have the right to restrict access to other farmers. The field can support a certain number of cattle, say ten, without being depleted. But any additional cattle added to the field beyond ten will deplete the field and everyone will suffer. In this case, every farmer has an incentive to add the eleventh cow, as the benefit from doing so will accrue only to that farmer, while the costs will be shared by all. Therefore, the owner of the eleventh cow has imposed a negative externality on the owners of the ten when he brings the cow to the field. The tragedy is that because individual incentives deviate from collective incentives, and there is no external enforcement, everyone is bound to suffer.

This example, or one like it, is used to illustrate many problems in the world. Pollution, overpopulation (as in the original Garrett Hardin article that I believe remains the most-cited in the history of the journal Science), climate change, financial regulation, etc. In many cases, we focus on the ability of institutions like government, property rights, or bargained contracts to overcome this tragedy and ensure a more efficient outcome.

The problem is that it makes no sense. At least, it makes no sense when translated into the language of externalities, which nowhere appear in Hardin's original article. To see why, remember this: there are no property rights in the commons. So while the eleventh cow is the one that puts the commons over the edge, this is only true because of its cumulative effect with cows one thru ten. Were any of of those ten absent (i.e. not just the eleventh), the presence of the eleventh would be no problem. Since no farmer has any more or less right to access the commons than any other, all the farmers are equally culpable when the commons becomes depleted. The owner of cow #11 is doing no more (or less) damage than the owner of cow #4. Since all are culpable and all share the cost, there is no externality. All the farmers are contributing equally to the problem, all are equally suffering the cost. The removal of any of the cows would solve the problem, and there is no established reason for the claim that the eleventh cow is the one that should be removed.

The logic of externalities requires an established property right that is being infringed upon. It also requires that someone is forced to pay the costs of an action without accruing the benefits from it. When we realize this, we also realize that the problem of externalities is a much smaller one than we first thought. It does extend to manufacturers that pollute a river that makes fishing impossible downstream, but only if the fisherman has a claim to the river and does no polluting on her own. It does not extend to a financial crisis that culminates in some people being unemployed or losing wealth via asset depreciation, unless (perhaps) the crisis was caused by fraud.

The question that remains: what about climate change? Is this an externalities problem? Every society that has the capability to pollute does so, albeit at differential rates. While the infamous Summers memo was obviously sarcastic, there is a kernel of truth embedded in it: pollution is a by-product of economic activity, all of which generates waste, and the lack of which is a greater threat to human well-being in the developing than climate change. The pollution levels of even low-polluting industrial countries like Japan would be more than enough to warm the planet if all countries polluted at that rate. This is analogous to the owner of the eleventh cow: whenever anyone comes into possession of this cow, they will add it to the commons and everyone suffers. We don't fault the owner of the eleventh cow for ownership, we fault the structure of the interaction. If the only difference between the culpable and non-culpable is opportunity, can we really feel comfortable ascribing blame?

Secondly, is it really clear that people in Bangladesh (say) have a rights claim to an climate environment that is not two or three degrees warmer than it is right now? How did they acquire this right? This is an important point when considering the politics. Some countries, such as Russia and Canada, will likely benefit from a warmer climate. Some countries will suffer. Some countries, like the United States, will probably not be greatly affected in aggregate, but within the country some groups will benefit while others will suffer. Similarly, taking large efforts to prevent or mitigate climate change will benefit some and harm others. How do we resolve this without some sense of who has what claim to what type of climate?

None of which is to deny that even if climate change does not represent an externalities problem, it nevertheless may constitute a human problem. And really I'm less interested in climate change per se as I am in the fact that the tragedy of the commons is not necessarily an externalities problem as we usually think.

I'm planning to follow this post with another post on why we might not want to force people to internalize externalities in all contexts.


Thomas Oatley said...

This post is either confusing or confused. ToC are not externalities for the simple reason that there are no property rights. Negotiations over climate change are difficult precisely because they are negotiations over property right assignment. Who has the right--polluters or pollutee? The distributional consequences arising from internalization will be determined largely by that initial assignment. Who is it that usually equates externalities and ToCs? This is, as you point out, wrong.

I really don't get your last point at all. You are saying that the concerns about the distributional consequences should trump the concern about aggregate social welfare?c

LFC said...

Climate change "may be a human problem"? I think you might want to use a stronger word than "may". The issue is not so much whether Bangladeshis have a "right" to a certain climate level as whether there is a global obligation (rooted in morality not law) to ensure that a sizable part of their country is not eventually washed into the sea.

Kindred Winecoff said...

Thomas, not confused. Perhaps confusing. This post was motivated by a roundtable discussion I was recently a part of that included professors and grad students from several social sciences and philosophy in which we discussed ToC. None of them could grok what I meant when I said it wasn't about externalities.

LFC, fine. As I say, climate change per se was not the point of the post. I phrased things weakly so as not to distract from the main point, and also because I know basically nothing about climate science except that the error bars are large. So I don't know what the probability is of Bangladesh being washed into the sea, or any other outcome that gets discussed.

Camille said...

I wanted to point out, in response to Thomas Oatley's question ("Who is it that usually equates externalities and ToCs?"), that there is an abundance of references that connect these concepts. If you require a property right to have a clear cut example of an externality every time, you'd practically have to rewrite every textbook example of negative and positive externalities (e.g. barking dogs, car exhaust, vaccinations, building restoration, "business stealing"), etc.).

Negative Externalities and the Tragedy of the Commons
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