Familiar with the parable called "Tragedy of the Commons"?
It goes like this:
Villagers share grazing land. Instead of each one having their own fenced piece of it, they are all free to use the whole extent of the pasture. Every villager owns one cow and everything works great.
One day a local idiot realises that he could get rich by having more cows. He buys ten cows and uses the common pasture to feed them.
Other villagers get pissed off bacause: First, the idiot gets richer than them. Second, he've uses the property that's at least partially owned by them to make the money.
It feels like free riding. Thus, each other villager buys ten more cows to get even.
The pasture becomes rather crowded at that point and in short time it turns into a sea of mud.
Shortly after the cows die of hunger, followed by the villagers not long after that.
That much for the parable.
So far so good.
Now think about this: The name "Tragedy of the Commons" implies that the morale of the above story is, to put it simply: "Private property good, public property bad." See the logical fallacy here?
Not yet? Well, to prove that the scenario described by the parable is caused by public ownership of the pasture, you have not only to show that it happens when the land is public, but also that it does not happen when the land is privately owned. And we haven't considered the latter option yet!
So, let's have a look at what happens when it is privately owned. Everyone has it's own piece of pasture safely fenced and everybody feeds their cattle only on their own land.
Once again the local idiot buys ten cows instead of a single one that his pasture would be able to sustain in the long run.
The villagers laugh because they know that having that much cattle is not sustainable and the idiot is going to fail eventually.
However, he's not going to fail in short term. He becomes ten times as rich as everyone else, builds a big house for himself, buys a Ferrari, starts playing golf with important people etc.
At this point other idiots from the village, guided by pure envy, resign at long-term sustainability and buy ten times more cows than their land is able to support.
The majority, however, still laughs as they know that the idiots are going to fail in the long run.
In the meantime, the supply of milk, butter, cheese, beef and leather to the market steadily increases. The idiots are producing ten times as much goods after all. At the same time, the number of consumers of dairy products and beef doesn't change. In other words, the supply increases but the demand stays fixed. And according to Economy 101, the prices are going to drop.
Everyone's going to gain less. The idiot has to sell his Ferrari, but he still fares pretty well. He has the big house and goes hunting with important people.
The honest guys stop laughing though. Suddenly, they are earning a fraction of what they've were used to. To survive and feed their families, most decide to buy more cattle and start overgrazing even though they know it's not sustainable in the long run.
The most stubborn ones live of debt and are unable to pay back. Later on they go bankrupt and their land is auctioned and sold to the idiot, who in turn buys more cows and starts overgrazing it.
In the end, all the land is turned into sea of mud and everyone dies of hunger, except, maybe, for the idiot who uses the connections he've made while playing golf and hunting to get into politics.
As can be seen, both "commons" and "private property" scenarios lead to the same outcome. Thus, calling the parable "tragedy of the commons" is misleading. The real name should be "the tragedy of overgrazing" and the morale should be: "If prople overutilise resources, everyone's going to suffer in the end."
Except that it's a pretty bland statement. Definitely not as catchy as "public bad, private good" that we've seen before.
Can we do better than "overgazing bad"?
Well, it feels like we can. Intuitively, there seems to be more substance to the parable than that. Thus, let's analyse it further.
The intuition is that private property is better than commons because the idiot would fail faster if he overutilises his own land compared to when he gets a free ride on the commons sharing the land with well-behaved individuals.
In other words, the way to fight overgrazing is to let the perpetrators fail as fast as possible.
Yet more formally: If overexploiters fail before they manage to distort the market, everything is going to be OK. If they distort the market before failing, the market will collapse.
The sustainability policies should thus be crafted in such a way as to speed the failure. Privatisation is one such policy. It's not very efficient though. Speed of failure as a consequence of overexploiting private property doesn't match the speed of modern markets. The former may take years, the latter happens in couple of days.
One can think of different measures to speed the failure. Privatisation is one such measure. It's not very efficient one though. It may still take years to fail on a private property. The really fast way to make the overexploiters fail is regulation: Fine them out of business once they start misbehaving. And, to get back to the topic of this essay, fines work equally well on commons and on private property.
Martin Sústrik, Nov 29th, 2013