Common Goods (Common Resources) in Economics. Overview and Explanation

A common resource is a resource that has two characteristics. 
  • Non-excludable
  • Rivalrous
I want to give you an example to explain what those terms mean. So let's take the ocean it's very difficult to exclude people from being able to use the ocean. If you're a country and you say "We think that there's a problem with overfishing." might be difficult to prevent people from going into the ocean and fishing. So that's what we mean by non-excludable. Rival risk means that basically if somebody goes out and catches a fish out of the ocean that's one less fish that somebody else could catch, so there's not just some unlimited number of fish in the ocean there's a finite number of fish and if I catch a fish that's one less fish that you or somebody else could catch.

So I want to talk about this in the context of lobsters. Let's take lobstering and let's think about the ocean and let's say you want to catch lobsters for a living the more boats you have the more lobsters you're going to be able to catch. So the number of fish you catch per boat is gonna decrease as the number of boat increase but even so, you have been an advantage you would continue to get more and more boats you could catch more and more lobsters. You're gonna continue to increase the number of boats that you have until you reach the point where the return per boat is equal to your marginal cost. So we can think of that as your marginal private benefit is gonna be equal to the marginal cost that's the decision rule you're going to follow. But think about it when you add more boats when you increase the number of boats you're reducing the catch of other boats, so there are other people out trying to catch lobsters and so each additional boat that you put out in the ocean is going to decrease the number of lobsters they're available to the other boats. So adding another boat is imposing a cost on these other fishermen and so it's actually it's a negative externality.

So I want to graph this out and show you the nature of the externality. So let's say that we've got the price up here in the x-axis and you can think of this as the number of fish or the value of the fish. Then we'll have quantity in the y-axis. With the quantity, we'll have the number of boats to go out and catch lobsters and so I wanted to show you the return to this and how the marginal private benefit differs from the social benefit. So let's take let's say that the marginal cost let's just say the marginal cost is the green line, the cost of a boat and so let's say that the average return to having a boat it's downward sloping so we could think of this as the marginal private benefit and the reason I keep calling a private benefit is different from the social benefit, I'm gonna talk about that but this is the average return per boat or of having a boat.

Now what I want to show you is why we have an externality. Let's say that we got the marginal social benefit and the social benefit is the benefit when we think about society in general. For this private benefit, let's say you have a lobstering company you're just considering the benefit of paying off the return per boat. When you're just saying "Oh do I get another boat, do I not get another boat?" You're only looking at your return of how many more fish will I catch if I get this extra boat and then you're comparing that to the marginal cost of a boat. So where we're gonna end up and in a free market is we're gonna end up here at E1 point, this is going to be our equilibrium number of boats. So this is the equilibrium number of boats that we're gonna have and let's just say it was 1000. So there's a thousand lobster boats.

Now from society's perspective, the socially efficient or optimal number of boats is going to be Q* which is less or it's gonna be a lower number. So that this is the efficient and also the free market is not going to produce an efficient number of boats and the reason is that there's a difference between marginal private benefit and marginal social benefit curve. So you're just saying with your company "Look I'm just going to stop buying boats, I'm gonna stop putting boats out there when I get to the point where the cost of doing so is equal to the benefits." because you're not going to continue to put get boats if the benefit is lower than the incremental cost. So you're gonna do so until your benefit is equal to the cost but that equilibrium, that is produced by the free market is actually higher than the socially efficient quantity. So it's actually from a social perspective weighing all the costs and benefits to all the people in your country or what it would actually be best if there were just 600 boats.

The reason that the socially efficient number is lower than what the free market produces is that when you are making your decision saying "Hey I'm gonna keep producing boats or getting boats out there until my benefit the incremental benefit equals the incremental cost." is because you're not considering costs to other lobstermen, you're not considering "What about these other lobstermen by me getting another boat out there, I'm just catching some fish or some lobsters that would have been caught by other lobster boats." anyways by these, you're just looking for your own self-interest and that's fine but we need to understand that there's a problem here because we're actually this common resource it's basically now there's an incentive to overuse it. There's an incentive to overuse it because people are just trying to put more and more boats out there and we see that it's being in this example there are 400 additional boats of (1000 - 600) we got almost double the number of boats out there that we should have from a socially efficient perspective. So that could lead to overfishing it could deplete the lobster supply and we've seen this happen in the real world where you see fish stocks or our lobsters are depleted and it's basically because of the situation you have common research where it's difficult to restrict people from going into the ocean but by the same token there creating costs when they do so. If they go out they're getting an incremental benefit may be from having an extra boat but they're imposing costs on some of the other people with boats as well and so we're gonna overproduce we have too many boats the quantity is too high.

So basically there's a number of ways you could deal with this one way that is proposed and some people don't like this but is privatization. If we have a lake or something if you have a private owner instead of it being like government land or whatever government lake or something then the private owner has an incentive to basically that they'll find a way to restrict access and make sure that there's not overfishing. Another way is if some people have issued licenses for lobstering or for things like that and now people have an incentive because the license has value in and of itself they don't want to completely deplete the fish stock or the lobster stock and we'll talk about these methods in another article to come but just want to give you a quick introduction to the idea of common resources and how they lead to overuse and how the free market will end up with just basically the resource being depleted.

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