Table of contents

This section of the book looks in detail at the impact common access resources have
on environmental economics. The chapter considers how government policy and
international agreements look to correct the market failures associated with common
access resources and make economic activity more sustainable.

What you should know by the end of this chapter:

Common access resources

Tragedy of the commons

Managing common access resources through:

Property rights
Command and control regulation
Collective self-governance
Porter hypothesis
Carbon taxes
Tradeable permits
International agreements

Revision material
The link to the attached pdf is revision material from Unit 2.8(4): Common
access (pool) resources. The revision material can be downloaded as a
student handout.

Revision notes

What is environmental economics?

If economics is the study of how society allocates scarce resources to satisfy human wants, then environmental
economics considers this statement in the light of how economic activity impacts the environment. We know from
our study of market failure, that the external costs resulting from consumption and production in free, unregulated
markets have a negative effect on the environment and that governments along with international organisations
have an important role in correcting these failures.

This section of the textbook looks in detail at the impact common pool resources have on environmental
economics. It considers how government policy and international agreements look to correct the market failures
associated with common access resources and make economic activity more sustainable.

Common pool (access) resources and sustainability

What is a common pool resource?

Common pool resources are resources that firms and individuals can access in society without restriction.
Common pool applies to resources like forests for timber, the sea for fish and areas of land for mineral deposits.

Characteristics of common pool resources

Common pool resources are associated with two characteristics:

Common pool resources are non-excludable because they occur naturally in the environment, and
without government intervention, it is very difficult to limit access to them. Anyone can access fish in the
sea and cut down trees in a forest if there is no legal system to prevent people from doing this

Common pool resources are rivalrous because the consumption of them by one individual does reduce
their availability to others. If someone takes fish from the sea or cuts down a tree it is not available for
someone else.

Inquiry case example - Gold in the forest

Adapted: https://www.smithsonianmag.com

It’s a few hours before dawn in the Peruvian rainforest, and five bare light bulbs hang from a wire above a 40-foot-
deep pit. Gold miners, operating illegally, have worked in this chasm since 11 am yesterday. Standing waist-deep
in muddy water, they chew coca leaves to stave off exhaustion and hunger.
This gaping cavity is one of the thousands being gouged today in the state of Madre de Dios at the base of the
Andes—a region that is among the most biodiverse and, until recently, pristine environments in the world. No one
knows for certain the total acreage that has been ravaged by illegal gold mining. At the same time, miners are
contaminating rivers and streams, as mercury, used in separating gold, leaches into the watershed. Ultimately, the
potent toxin, taken up by fish, enters the food chain.

Gold today commands a staggering $2,000 an ounce, more than six times the price of a decade ago. The surge
is attributable to demand by individual and institutional investors seeking a hedge against losses and also the
insatiable appetite for luxury goods made from the precious metal.

“Who is going to stop a poor man from Cuzco or Juliaca or Puno who earns $30 a month from going to Madre de
Dios and starting to dig?” asks Antonio Brack Egg, formerly Peru’s minister of the environment.

Whilst it is illegal to mine for gold in Peru it is very difficult for an over-stretched and under-resourced government
to limit access to the Amazon rainforest. Corruption probably plays a part as well.

Worksheet questions

Questions

a. Define the term common pool resource. [2]

b. Outline the two characteristics of illegal gold mining as a common pool resource. [4]

c. Using a demand and supply diagram, explain how an increase in the price of gold has led to an
increase in illegal gold mining. [4]

Investigation

Look into the illegal gold mining in Peru and think about the reasons why it exists and the problems it
causes.

Property rights
Property rights exist when an individual or a firm has ownership of a resource. When a farmer owns a field they
have property rights over that field and have the legal right to control its use. They can put a fence around it and
other people cannot legally use the field. Common pool resources do not have property rights assigned to them
and nobody owns them. For example, there are no property rights on the open sea. The lack of property rights
makes common pool resources non-excludable.

Sustainability

This is where the use of resources in the economy meets the needs of the present generation without adversely
affecting the needs of future generations. Unsustainable economic activity is often associated with the over-
consumption of common pool resources which reduces their availability to people in future. They are also often
associated with external costs which have a negative impact on people in the present and also people in the
future. The way the burning of fossil fuels impact the atmosphere as a common pool resource is an important
example of this.

Common pool resources and market failure

Non-excludability and zero price

The non-excludable nature of common pool resources

means there is no price attached to their consumption.
In many cases common pool resources are also used
in production, so free access to them at zero price
means they are a zero cost to producers who use
them. This leads to their exploitation. If an area of
land can be freely accessed to cut down trees, people
will clear a forest in an unrestricted way until significant
deforestation has taken place and there is no forest for
future generations to benefit from. The exploitation of
common pool resources means they are being used in
an unsustainable way.

External costs

When common pool resources are over-consumed there will often be significant external costs as well.
Deforestation negatively affects third parties because it adds to climate change and reduces biodiversity. You can
also make the externality argument when the use of common access resources now reduces their availability to
future generations. Over-fishing now means fish will not be available to people in the future who would be
considered a third party.
 Diagram 2.51 illustrates the external
costs of overfishing the sea. The market
output is at Q which is above the socially
efficient output of Q*. There is an over-
allocation of resources and the yellow
shaded area represents the welfare loss
to society.

Developing countries

The exploitation of common pool resources often takes place in less developed countries where property rights
are not established effectively. People in poverty are often forced to exploit cheap resources available to them.
Lots of deforestation takes place in developing countries when people are involved in illegal logging and mining to
make enough income to survive.

Tragedy of the commons

The theory of the tragedy of the commons was put forward by an

ecologist called Garrett Hardin. He argued that the use of
common pool resources leads to a ‘shared-resource system’
where people over-produce goods using common pool resources
because it is in their self-interest to do so. If a resource can be
accessed at zero price then it is in the producer’s self-interest to
make as much profit as they can from using a zero priced
resource. People are likely to over-fish the sea or cut down a rain
forest because of the profit they can make doing this. The tragedy
of the commons shows how common pool resources are a
market failure and are not sustainable.

Garrett Hardin: Tragedy of the Commons

Free rider problem

The free-rider problem also applies to common pool resources where some people choose to benefit from other
people’s actions. All people in the fishing industry might accept there is a need to reduce fishing in the present to
preserve stocks for the future and agree to cut current fishing. But as a voluntary agreement, some producers
might keep fishing at the same level and free ride off the reduced fishing of others.

Policy approach to common access resources

Common access resources need government intervention because their use leads to an over-allocation of
resources. This depletes resources for the future which is unsustainable and the over-use of common pool
resources leads to negative externalities.

Assigning property rights

Economists often look at the problem of common pool resources as a property rights issue. A property right is an
individual’s right to control what they own and to be compensated when that right has been infringed. If someone
takes flowers from your garden, you can take legal action against the person who has taken them. The use of
common pool resources is un-controlled because there are no property rights assigned to them. Anyone can
access a piece of common land, a river or a lake and extra resources without any legal restriction. By assigning
property rights to a forest people who cut down trees have to pay the owner who can use the income to plant new
trees. Without property rights, people will cut down trees and not replant them which means deforestation will
take place.

Inquiry case example - The Coase Theorem

The Coase Theorem was developed by economist

Ronald Coase. It can be looked at in the context of air
as a common pool resource because its use is
rivalrous and non-excludable. Coase believed that
bargaining between two parties could resolve a
negative externality that arises when there is air
pollution. For example, consider a dispute between a
coffee shop and local resident about noise from the
coffee shop which disturbs the residents. The residents
have to put up with the noise pollution of the coffee
shop and the business does not want to adversely
affect its reputation. Coase believed the situation could
be settled by a low-cost negotiation between the coffee
shop and the residents. The coffee shop could make
an agreement with the resident to put in place a noise
reduction policy where people are not allowed to
consume coffee outside the shop before 10 am and
after 5 pm and residents agree to allow the shop to put
tables and chairs outside the shop during those hours.

 Worksheet questions

Question

a. Explain how common pool resources are over-exploited by a lack of property rights. [4]

b. Explain how common pool resources are an example of market failure. [10]

Investigation
You can see these examples of these informal agreements taking place across the economy but what do
you do with a business that refuses to compromise and how does the Coase Theorem work at a global
level with CO2 emissions?

Advantages of property rights:

Property rights provide a market solution to the common pool resources problem. By allocating property
rights common pool resources now have owners and can be made excludable.
Owners of common pool resources have an incentive to manage them sustainably or there will not be a
long-term source of income from them.
Allocating property rights is a relatively low-cost way of dealing with the common pool resource problem.

Disadvantages of property rights:

The owner might not have social efficiency as an objective of their ownership of a common pool resource.
An owner of a forest might allow deforestation.
Some common pool resources are areas of natural beauty that society wants to be maintained in a
particular way. National parks, for example, are owned and controlled by governments.
The legal costs associated with the resolution of property rights disputes can be significant.
It is not always practical to assign property rights. Many external costs are ‘air-borne' and it is not possible
for people to own the airspace around them.

Command-and-control regulation

The aim of command-and-control regulations is for government to

set specific limits on environmental pollution. The regulations also
set out how technology can be used to control pollution.
Examples of command and control regulations come from the US
in the form of The Clean Water Act, Endangered Species Act and
The Clean Air Act. For example, the US has government-imposed
regulations on power plants to use cleaning technology in their
smokestacks that removed pollutants like sulphur dioxide. There
is also an Endangered Species Act that prevents the hunting of
certain wild animals.

Endangered Species Act (ESA)

Advantages of command and control regulation

By using the law, it forces firms to take action that reduces the negative externalities of production that
occur with the exploitation of common pool resources
It provides a set of regulations to form a national framework that reduces the environmental costs that are
associated with common pool resources
Strict command and control regulations can induce firms to develop technology that allows them to meet
the regulations set. This is known as the Porter Hypothesis, named after the economist, Michael Porter.

Disadvantages of command and control regulation

There are no incentives for businesses to improve the quality of the environment beyond the standard set
by the law. Firms do not need to improve their production methods if they are within the regulations set.
The regulations do not distinguish between firms that find it easy to meet the standards set and those that
do not. For those that find it difficult, the regulations will come with a significant cost and those firms may
 even go out of business which will lead to unemployment.
Like any regulation, they will increase production costs which could cause unemployment and lead to
higher prices for consumers.

Collective self-governance

The collective self-governance approach to the negative environmental consequences of common pool resources
is based on the work of Nobel Prize-winning Economist, Elinor Ostrom. Her theory viewed government-directed
regulation as bureaucratic and less effective at achieving their environmental aims as ordinary citizens working
together to solve environmental problems.

Ostrom found evidence across the world of local people working together to solve the environmental costs
associated with the tragedy of the commons. Left to themselves the local population would find solutions to
environmental problems that met their own needs rather than those of a detached government imposing them
from some distance away.

An example of self-governance is Maine’s fishing community that

specialises in lobster. In Main’s fishing towns the local people
make and monitor their own rules and have their own set of
punishments for people who break the rules. The fishing territory
for lobster is broken up into set boundaries decided on by the
fishing community and groups known as ‘harbour gangs’ are only
allowed to fish in their allocated area. This approach to dealing
with common pool resources is backed by formal government
regulation on catching lobsters.

Advantages of collective self-governance

This approach allows for the needs of local communities who know and understand the specific issues
they face from common pool resources and are more likely to follow their own regulations rather than
those imposed on them.
By working at a local level, the negative externalities associated with the common access resources can
be targeted specifically rather than a ‘one size fits all’ national approach.
Collective agreements are more flexible than national regulations and can change as the environmental
situation changes. If the lobster population suddenly declines the catch regulations can be tightened
quickly.

Disadvantages of collective self-governance

Without legal backing, the enforcement of rules relating to common pool resources relies on the goodwill of
participants and this may not always be present. What happens if one business in Maine decides to catch
lobsters outside of its area and refuses to follow local rules?
Collective self-governance might work in the present but may not consider the future in the same way. If
the incomes of people in the lobster industry start to fall, there would be pressure to catch more now which
reduces the sustainability of the industry
Many common pool resource issues are global and cannot the effectively managed at a local level.

Carbon tax

Carbon taxes are imposed on the use of fossil fuels such as coal, oil and gas. Carbon taxes focus precisely on
one of the most significant causes of climate change by directly trying to reduce CO2 emissions from the use of
fossil fuels. The tax is levied on firms based on the amount of carbon they use to produce their good or service.
The tax aims to get businesses and consumers to switch to energy generated by renewable sources such as
solar and wind power. Some of the taxes levied on businesses would increase the price the consumer pays, but
this could be repaid to consumers through a tax credit paid from the tax revenue collected by the government.

Diagram 2.52 illustrates how a carbon

tax affects the market for electricity. The
tax causes the supply curve to shift to
the left and cause the market price to
rise to P1 and output Q to shift to Q1
which is closer to the socially efficient
output at Q*. The welfare loss triangle is
reduced from the yellow shaded triangle
to the smaller green triangle.

Advantages of a carbon tax

The tax focuses on a major source of climate change and acts as an incentive for firms to switch to
renewable sources of energy.
Revenue raised by the tax can be used to subsidise innovation in the development of renewable energy.

Disadvantages of a carbon tax

A tax will increase the price of energy to consumers if producers pass on the tax increase. This could have
a significant impact on low-income households.
As business costs are increased by the tax it reduces their profits which leaves businesses less money to
invest in developing low-emission technology.
Higher production costs resulting from the tax could lead to a reduction in output and cause
unemployment.

Tradeable permits

The use of tradeable permits or carbon training is seen as an important ‘incentive based’ method for businesses
to reduce CO2 carbon emissions. Air is a common access resource and tradeable permits create a market that
introduces a limit to the amount of CO2 pollution that can be emitted into the air.

For detailed coverage of this policy see chapter 2.8(2) on policies to deal with external costs.

Inquiry case example - International agreement

The Paris climate agreement was finally sealed on 12 December 2015 and became effective on 4 November
2016. This is an agreement that was set to replace the Kyoto Protocol with improved measures to combat the
increasing threat of global warming. It was signed by 197 countries and ratified by 187 in November 2019.
The main components of the Paris climate agreement are:

Aim to maintain global temperatures below 2.0C above pre-industrial levels and try to achieve a
temperature rise of only 1.5C.
To limit greenhouse gas emissions by human activity to the level the natural environment (trees, soil and
seas) can absorb.
A commitment from more developed countries to support help less developed countries by giving them
financial support to reduce CO2 emissions and to adopt renewable energy.
An assessment every five years of each country's contribution to reducing CO2 emissions.

The Paris agreement has been hailed as a significant move in the fight against climate change, but it was dealt a
blow in June 2017 when President Trump announced the US withdrawal from the agreement.

Worksheet questions

Questions

Using a real-world example, evaluate the effectiveness of using taxation to reduce the market failure of air
as a common access resource. [15]

Investigation

With your class investigate the Paris Agreement and discuss the chances this agreement has of
successfully reducing CO2 emissions and combating climate change.

Thinking about a key concept - Scarcity

Which of the following is the least likely explanation of why common pool/access resources are a market failure?

A. Their exploitation is unsustainable

B. They are excludable

C. Lack of property rights

D. Their use is associated with significant external costs

Which of the following options best describes the situation where a fishing fleet does not conserve fish stocks because
they believe other fleets will conserve stocks and reduce the sustainability problem of fishing?

A. Free rider problem

B. Property rights

C. Negative externalities

D. Tragedy of the commons

Which of the following is not a policy to reduce the market failure associated with common pool/access resources?

A. Tradeable permits

B. Positive advertising

C. Carbon tax

D. Command and control regulation

Which of the following is most likely to be an example of a common pool/access resource?

A. Free bus service

B. Fish in a lake

C. Streetlighting

D. Free healthcare check

 7

Which of the following is least likely to be a common pool/access resource?

A. Timber in a forest

B. Water in a lake

C. Wifi service

D. Beach