43. Common Pool Resources

Note: This post is the forty-third in a series. Click here for the full listing of the series.

Back in 1968, Garrett Hardin wrote an influential essay entitled, 'The Tragedy of the Commons'. Hardin started with the problem of what it is we should seek to maximize. He noted that with respect to human population there was a tradeoff between quality of life and quantity of population, concluding that, "The optimum population is, then, less than the maximum."

Hardin goes on to note, as I mentioned a while back, that in a situation where a group of people are sharing a common resource, the logic of the prisoner's dilemma (what's best for me diverges from what is best for the group) leads to tragedy,

"The tragedy of the commons develops in this way. Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons. Such an arrangement may work reasonably satisfactorily for centuries because tribal wars, poaching, and disease keep the numbers of both man and beast well below the carrying capacity of the land. Finally, however, comes the day of reckoning, that is, the day when the long-desired goal of social stability becomes a reality. At this point, the inherent logic of the commons remorselessly generates tragedy.

As a rational being, each herdsman seeks to maximize his gain. Explicitly or implicitly, more or less consciously, he asks, "What is the utility to me of adding one more animal to my herd?" This utility has one negative and one positive component.

1. The positive component is a function of the increment of one animal. Since the herdsman receives all the proceeds from the sale of the additional animal, the positive utility is nearly + 1.

2. The negative component is a function of the additional overgrazing created by one more animal. Since, however, the effects of overgrazing are shared by all the herdsmen, the negative utility for any particular decision­making herdsman is only a fraction of - 1.

Adding together the component partial utilities, the rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another.... But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit -- in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all."

Note the similarities to the example of harvesting a forest that I used in the last post and the similar introduction of the notion of limits.

Hardin goes on to note that what is moral depends on the context,

"That morality is system-sensitive escaped the attention of most codifiers of ethics in the past. "Thou shalt not…" is the form of traditional ethical directives which make no allowance for particular circumstances. The laws of our society follow the pattern of ancient ethics, and therefore are poorly suited to governing a complex, crowded, changeable world. Our epicyclic solution is to augment statutory law with administrative law. Since it is practically impossible to spell out all the conditions under which it is safe to burn trash in the back yard or to run an automobile without smog ­control, by law we delegate the details to bureaus. The result is administrative law, which is rightly feared for an ancient reason -- Quis custodies ipsos custodes? --Who shall watch the watchers themselves? John Adams said that we must have a "government of laws and not men." Bureau administrators, trying to evaluate the morality of acts in the total system, are singularly liable to corruption, producing a government by men, not laws.

Prohibition is easy to legislate (though not necessarily to enforce); but how do we legislate temperance? Experience indicates that it can be accomplished best through the mediation of administrative law. We limit possibilities unnecessarily if we suppose that the sentiment of Quis custodiet denies us the use of administrative law. We should rather retain the phrase as a perpetual reminder of fearful dangers we cannot avoid. The great challenge facing us now is to invent the corrective feedbacks that are needed to keep custodians honest. We must find ways to legitimate the needed authority of both the custodians and the corrective feedbacks."

The question of how to achieve temperance in the use of the commons is one that has been taken up in recent decades by Elinor Ostrom, winner of the 2009 Nobel Prize in Economics.

Ostrom starts by recounting three influential models: the tragedy of the commons, the prisoner's dilemma, and the logic of collective action. She then contrasts two theoretical approaches to managing a commons: The 'Leviathan' Approach in which a strong central authority limits use of the commons to what is sustainable, and the 'Privatization' approach, in which the commons is replaced by a system of private property rights (e.g. every fisherman is given ownership over a particular piece of ocean or a particular group of fish).

Ostrom, after conducting extensive fieldwork around the world on what she calls common pool resources (small scale situations where a group of people manage a renewable but not inexhaustible resource - e.g. inland fisheries, pastures, irrigation systems, etc.) ends up rejecting both the Leviathan approach and the Privatization approach in favour of what she encountered in her research: locally managed and run collectives that are neither run directly by a central government (although support from the government is generally helpful) nor managed via a system of individual property rights (although granting of individual licenses of some sort is often part of the management approach).

Per wikipedia, Ostrom identifies eight requirements for insitutions that managed common pool resources to be successful:

"1. Clearly defined boundaries
2. Congruence between appropriation and provision rules and local conditions
3. Collective-choice arrangements allowing for the participation of most of the appropriators in the decision making process
4. Effective monitoring by monitors who are part of or accountable to the appropriators
5. Graduated sanctions for appropriators who do not respect community rules
6. Conflict-resolution mechanisms which are cheap and easy of access
7. Minimal recognition of rights to organize (e.g., by the government)
8. In case of larger CPRs: Organisation in the form of multiple layers of nested enterprises, with small, local CPRs at their bases."

Note how point 1, clearly defined boundaries, corresponds to the Guardian syndrome as representing territorial concerns. Points 4, 5 and 6 correspond to the Guardian value of taking vengeance as appropriate. Point 8 harkens back to the work of Mancur Olson (The Logic of Collective Action) which noted that the problems of motivating group-oriented (as opposed to self-oriented) behaviour in large groups could be mitigated by a hierarchical structure (as supported by the guardian values of obedience and respect for hierarchy).

The institutions that govern common pool resources, are clearly guardian-type institutions, managing a particular territory, based on taking rather than trading, seeking to optimize rather than maximize output, and requiring collective restraint rather than pursuit of self-interest. But at the same time, the participants who are extracting the resources are functioning to some extent as commercial operators - looking to make a living by trading what they extract, and pursuing innovation to the extent it helps them become better off.

A high standard of ethical behaviour is required of participants in the common pool management to be able to maintain a guardian based approach to management of the land on one point, while still retaining their commercial approach to trading the resource on the other hand. This may be why institutions for managing common pool resources failed in many (although by no means all) of the cases Ostrom studied.

I'm only scratching the surface of Ostrom's work in this post, and hopefully I'll have a chance to come back to it in more detail at a later date.

3. The Prisoner's Dilemma

links to Part 1 and Part 2

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The last post in this series talked about externalities and before moving along from that topic I want to highlight two particular types of externalities.

In this post, I want to talk about the situation where two (or more) people enter into transactions with other parties that have negative externalities that affect each other - negative externalities that are large enough to wipe out any gain they made from their initial transaction.

An example will make this clearer, and we might as well start with the example that gives this particular type of situation it's name, the Prisoner's Dilemma.

Wikipedia summarizes the classic 'Prisoner’s Dilemma' situation as follows:

Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal. If one testifies (defects) for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. How should the prisoners act?

Let's call one prisoner Larry and the other Curly. Put yourself in Larry’s shoes. If Curly is going to stay silent to protect Larry, Larry would be better off to betray him (and go free). If Curly is going to betray Larry, Larry is still better off to betray him and take the 5 year sentence rather than the 10 year sentence. The same logic holds true for Curly.

So Larry makes a win-win transaction with the detective (to betray Curly) but this transaction has a negative effect (externality) on Curly. Similarly, Curly makes a win-win transaction with the detective that has a negative effect on Larry.

To summarize:

Transaction 1, Larry makes a deal with the detective: Detective +, Larry +, Curly --
Transaction 2, Curly makes a deal with the detective: Detective +. Larry --, Curly +
Net Result: Detective ++, Larry -, Curly -


Now, you might argue that if Larry thinks Curly is going to stay silent to protect him, then Larry is not better off to turn Curly in, because Larry owes Curly the same sort of protection, or that Curly will remember that Larry turned him in and take revenge once he gets out of jail or because Larry will feel bad about turning Curly in. All of those things may be true, but if they are, that doesn't mean that this is a case where the prisoner's dilemma can be 'overcome' it just means that a true measure of the costs and benefits of each action needs to incorporate more factors than just the length of the prison sentence.

But, as long as we are in a situation where Larry’s payout (including the number of years of jail time, his own sense of ethics, concerns about retribution from Curly, etc.) is higher ratting on Curly vs. reciprocating Curly’s loyalty, then the situation is a prisoner’s dilemma and Larry will rat on Curly. The situation where some other factors at work lead Larry and Curly to stick together and not cooperate with the police is some other situation, not a Prisoner's dilemma.

In other words, the point is not how do we get someone to cooperate in a prisoners dilemma, the point is how can we change the payouts such that the situation is no longer a prisoners dilemma. For example, an organized crime family uses a 'law of silence' to introduce a moral code of loyalty which shifts the incentives for the prisoner's to rat each other out. On top of that, a credible threat to kill anyone who talks to the police shifts the relative payouts even further.

The result of the prisoner’s dilemma is that, for the people in the dilemma, they take an action designed to further their interests, but the end result does not end up serving their interests as they expected. Larry and Curly will both end up serving 5 years in jail when they could have just served two if they had only cooperated (with each other, not the police).


It is important to realize that the Prisoner's Dilemma is not just some contrived situation that hardly ever occurs in the real world, it is in fact almost ubiquitous in our lives. In the human world any time a party has something valuable to 2 or more other parties and plays them off against each other (e.g. an auction where people have to bid against one another, a customer that negotiates a lower price based on what a competitor is offering, etc.) you have a potential prisoner's dilemma.

In the natural world, any time two or more parties are sharing a common resource you have a potential prisoner's dilemma (e.g. tragedy of the commons)


Note that in the case of the two prisoners, they were reacting not to each other but to the offer made to them. There was no sense that first Larry would make a decision and then Curly would make a decision in response to Larry's decision. But the Prisoner's Dilemma can arise in that sort of reactive situation as well, only here you tend to get into 'Arms Race' type situations.

For example, I decide to tear down my modest house and build a monster home because I have a desire to have the largest house on the street. This is a win for me because it increases my satisfaction to come home and pull in to the largest house on the block. But it is a negative for my neighbour who now feels inferior - so he tears down his house and builds a bigger house on his lot. A win for him, but a negative for me. So I tear down my monster home and build an even bigger home. Each transaction is voluntary and is rational in the sense that it benefits the people making the transaction, but again the net result is that people are worse off because the zero sum nature of their goal (only one person can have the biggest house on the block) means that the negative externalities from each transaction outweigh the benefits.

Another more realistic example is when a Province decides it can lure away business from other Provinces by offering a lower corporate tax rate. This benefits that Province, until other Provinces retaliate by lowering their tax rates. Given the time lags, you can always point to how one Province is benefitting from lowering their corporate tax rates (for a while) but in the end, they all just end up collecting fewer taxes and there is no net benefit since there can always only be one jurisdiction with the lowest tax rate.

So the prisoners dilemma represents a special case of externalities in which the parties simultaneously or sequentially impose negative externalities upon each other such that even though every transaction is a win-win for the parties involved (Larry’s deal with the police is a win-win, and so is Curly’s deal with the police) the negative externalities mean that the parties stuck in the dilemma end up worse off.

The Prisoner's Dilemma is central to the points I eventually want to get to (I think) but there's too much material to cover in just one post, so I'll definitely be coming back to it in later posts. There's just one other point worth mentioning in this introduction and that is to note how the Prisoner's Dilemma gets harder to deal with as the number of parties involved escalates.

There are two dynamics at work here. One is that with a large number of parties, even an action that has a small negative externality per person affected can be a net negative. Take, for example, littering - the impact of litter on any given person is small, but since it affects many people the overall result is negative. The second element is that with a large number of people it is harder to change/structure the incentives so that the situation is no longer a prisoner's dilemma. With just two prisoner's, maybe Larry and Curly have a strong enough bond of loyalty to not rat each other out, but with a dozen prisoner's, somebody is likely going to talk.