The tragedy of the commons is a famous economic story that illustrates why common resources tend to get overused from the perspective of society. The narrative is based on the assumption that every individual tries to get the highest possible benefit from a given resource. In the case of common resources (i.e. resources that are easily available to everyone) this can lead to a situation where the resources are being exploited to the point where society as a whole suffers. We will see why that happens in just a minute, but before, we’ll have to travel a few years back in time.
The original narrative that described the tragedy of the commons takes place in a small medieval town. For the sake of this example, we’ll call it Commonville. In Commonville, most families own sheep. In fact, raising sheep is one of the most important sources of income. The families raise the sheep and earn an income by selling the sheep’s wool, which can be used to make clothing.
The families keep their sheep on the land surrounding Commonville. The sheep spend most of their time grazing there. At this time, the land does not belong to a specific individual or family. Instead, all the residents of Commonville own the land collectively. Therefore all families are allowed to graze their sheep on the land as they please. This form of collective ownership works well because there is enough land for everyone. As long as all the families can find good grazing spots for their sheep, the land does not show any signs of a rival good and everyone is happy.
However, as the population of Commonville increases over the years, so does the number of sheep grazing on the land surrounding the town. Because the amount of land does not grow accordingly, more and more sheep have to share the same amount of land. Thus, it becomes increasingly difficult for the land to regenerate and replenish itself. This continues until the fields surrounding Commonville ultimately become barren. As a result, it becomes impossible to raise sheep, the town’s wool industry disappears, and many families lose their only source of income.
The main reason that leads to such a tragedy is a discrepancy between the individual and social incentives. It takes a collective effort to safe the land around Commonville. If all families worked together they could reduce the number of sheep to a more sustainable amount that would allow the land to replenish itself.
However, from the perspective of a single family the incentives are quite different. Their herd only represents a small part of the issue and they cannot solve the problem by themselves. Therefore, they have no incentive to reduce the number of sheep they own, because that would ultimately only reduce their income while it won’t make matters any better. In other words, from their point of view it makes more sense to keep all their sheep and wait for other families to reduce the size of their herds. Unfortunately, that’s not going to happen because all other families think the same way.
Hence, the tragedy of the commons is essentially a market failure due to a negative externality. Every sheep that grazes on the land around Commonville reduces the amount and quality of food available to the other sheep. However, this does not affect its owners, so they have no reason to worry or do anything about it (at least for a certain amount of time). This eventually leads to an excessive amount or “oversupply” of sheep.
The tragedy of the commons can be solved like any other market failure that arises because of negative externalities. For example, in the case of Commonville the government could regulate the maximum number of sheep per family or auction off a limited number of permits to hold sheep. This would allowe the town to limit the total number of sheep on the land to a sustainable amount.
Alternatively the government could internalize the externality by placing a tax on every sheep. This would make it more costly to hold sheep and thus reduce the size of the herds on the land as well.
Last but not least, an even simpler way to solve the tragedy of the commons is by turning the common good into a private good. That means, the government of Commonville could simply divide all the land around the town into smaller patches and distribute them among the families. That way, every family is responsible for their own patch of land, which allows them to protect it against excessive grazing.
In a Nutshell
The tragedy of the commons is a famous economic story that illustrates why common resources tend to get overused. When one person uses a common resource, they diminish other people’s enjoyment of it. However, most people do not take this into account (i.e. it is a negative externality), which results in excessive use of the common resource. The government can solve this problem by imposing regulations, auctioning off a limited number of permits, imposing taxes that internalize the externality, or simply turning the common good into a private good.