Common Pool Resources are defined as non-excludable, but rival in consumption. Excludability is a property of a good where a person can be prevented from using it. Rivalry is a property of a good where one person’s use diminishes another person’s use. Externalities: costs/benefits that others face due to individuals’ actions. Externalities arise when those who use an asset (sink/source) but do not pay the full cost of maintaining the asset. The costs are transferred to common resources. Ostrom uses the example of the Alanya fishery in Turkey. Unrestrained overfishing depleted the stock to the point that the economic certainty of the local fishing industry was in doubt. Overfishing also caused hostility amongst fishermen as their nets got caught and transaction costs rose. The problem with common pool resources is that the private incentives of the user do not match up to the incentives of society as a whole. When one person uses a common resource she diminishes another person’s use but her incentive is to maximise her own benefit so she does not consider the social cost. This negative externality is why common resources tend to be used excessively. This can be shown through Hardin’s tragedy of the commons model. 10 farmers, 10 cows, max capacity of commons is 100
For each farmer: Profit = Revenue – Cost
Where cost = (#of cows)(unit loss)
The costs are low as it only accounts for the cost of the cow and loss in productivity as there is no cost in using the commons. The productivity loss is also low as it is shared by all the farmers. This means the farmer has the incentive to add more cows to her herd. However all farmers have this same incentive so the number of cows rises rapidly until the commons is over farmed and no-one can use it. The Prisoner’s Dilemma is a formalized game mirroring Hardin’s model used to explain why a rational strategy does not always lead to a rational outcome. Due to both prisoners attempting to maximise...