GAME THEORY ASSIGNMENT

Topic: From a Game Theory Perspective, analyze any specific

example of the concept of Tragedy of Commons. Find the
stakeholders and the decisions involved. suggest measures for
achieving an equilibrium position for your example.

JANUARY 14, 2024

MBA (2022-24)
SCMHRD, Pune
Have you ever thought about the environmental impact of the items used in your daily life? Are they
harming the environment? Perhaps they have a positive effect. For some individuals, this may be
the reason they chose these items in the first place.

Yet, this isn’t always the case. What if the production or use of your favourite products threatens
the ecosystem? Or worse, what if your consumption threatens the very existence of those products?

While this notion may seem implausible, it turns out there are many goods that are being produced
unsustainably, endangering resources, or negatively impacting the environment.

What Is Tragedy of the Commons?

The tragedy of the commons refers to a situation in which individuals with access to a public resource
(also called a common) act in their interest and, in doing so, ultimately deplete the resource.

This economic theory was first conceptualized in 1833 by British writer William Forster Lloyd. In
1968, the term “tragedy of the commons” was used for the first time by Garret Hardin in Science

Tragedy Of The Commons Examples:

1. Coffee Consumption

While a simple cup of coffee might seem harmless, coffee consumption is a prime example of the
tragedy of the commons. Coffee plants are a naturally occurring shared resource, but
overconsumption has led to habitat loss endangering 60 percent of the plants' species—including
the most commonly brewed Arabica coffee.

2. Overfishing

As the global population continues to rise, the food supply needs to increase just as quickly.
However, overhunting and overfishing have the potential to push many species into extinction. For
example, overfishing of the Pacific bluefin tuna has caused an all-time population low of
approximately three per cent of their original population. This not only endangers the Pacific bluefin
tuna but also risks further marine ecosystem endangerment as a result.

3. Fast Fashion

Overproduction by fashion brands has created extreme product surplus to the point that luxury
brand Burberry burnt $37.8 million worth of its 2018 season’s leftovers to avoid offering a discount
on unsold wares. Furthermore, as new trends emerge rapidly within social networks on the Internet
and social media, consumers are constantly purchasing new clothing items and disposing of old, out-
of-trend items that ultimately end up in landfills and contribute to pollution.

4. Traffic Congestion

Traffic congestion is one of the best-known modern examples of the tragedy of the commons.
According to a study by the Harvard School of Public Health, air pollution from traffic congestion in
urban areas contributes to more than 2,200 premature deaths annually in the United States alone.
As more people decide that roads and highways are the fastest way to travel to work, more cars end
up on the roads, ultimately slowing down traffic and polluting the air.
5. Groundwater Use

In the United States, groundwater is the source of drinking water for about half the population, and
roughly 50 billion gallons are used each day for agriculture. Because of this, groundwater supply is
decreasing faster than it can be replenished. In drought-prone areas, the risk for water shortage is
high and restrictions are often put in place to mitigate it. Some individuals, however, ignore water
restrictions and the supply ultimately becomes smaller for everyone.

Scenario: Overfishing in Shared Fisheries

Stakeholders:
Fishermen (individuals or companies): They want to maximize their catch to maximize profit.

Fishery Management Authorities/Government: They aim to sustainably manage the fishery for the
benefit of society, ensuring long-term viability.

Local Communities: Rely on the fishery for livelihoods and sustenance.

Consumers: Depend on the availability of fish as a food source.

Decisions Involved:
Individual Fishing Effort: Each fisherman has to decide how much effort (time, resources) to invest
in fishing.

Catch Limits and Regulations: Authorities must set regulations like catch limits, gear restrictions, and
fishing seasons to control the overall fishing effort.

Compliance: Fishermen decide whether to comply with regulations or engage in illegal, unregulated,
or unreported (IUU) fishing.

Investment in Sustainable Practices: Fishermen may decide whether to invest in sustainable

practices or exploit the resource without concern for the future.

Tragedy of the Commons Dynamics:

In an open-access fishery, each fisherman has an incentive to maximize their catch, leading to
overfishing. As more fishermen exploit the resource, the fish population declines, affecting the
long-term sustainability of the fishery. The cost of overfishing is shared among all fishermen, as the
resource is depleted, leading to reduced catches for everyone.

Measures for Achieving Equilibrium:

Catch Quotas and Regulations: Implementing and enforcing catch limits can help prevent overfishing
by ensuring that the total catch does not exceed sustainable levels. This requires cooperation and
compliance from all stakeholders.

Secure Property Rights: Assigning property rights to specific areas or fisheries can encourage
responsible management. When individuals or communities have a stake in the resource, they are
more likely to manage it sustainably.
Community-Based Management: Involving local communities in decision-making can lead to more
sustainable outcomes. Community-based management empowers local stakeholders to tailor
regulations to the specific needs and characteristics of their fishery.

Technology and Innovation: Investing in sustainable fishing practices and technology can improve
efficiency without causing harm to the resource. Techniques such as selective fishing gear and
aquaculture can reduce the impact on wild fish populations.

Enforcement and Penalties: Strict enforcement of regulations, along with penalties for non-
compliance, can deter illegal and overfishing activities. This helps ensure that decisions made for
sustainable resource management are adhered to.

Analysis of the Tragedy of the Commons using the example of overfishing in shared fisheries:

The ocean is a vast resource that many nations in the world have access to. It holds an abundant but
finite supply of fish. Crucially, nobody owns the ocean, and it is very difficult for one nation to
prevent another from fishing.

Each (coastal) nation’s fishing industry can freely access the ocean and send out fishing boats, where
the only costs it must pay are the cost of its fishing equipment and labour. Then, if this nation
maximizes its profit function from ocean fishing, it will choose a privately optimal level qi.

But, if every nation chooses to fish its qi, the supply of fish in the ocean will be reduced below the
replacement level (the point at which the supply of fish in the ocean will naturally replenish itself).
This leaves fewer and fewer fish left in the ocean each year, making everyone worse off.

Let’s assume in this example that the replacement level is also the socially optimal level of fishing
qo. Then, the sum of all qi, q1 + q2 + … + qN > qo, which means that society is overfishing. Each year,
the amount of fish in the ocean will be less than the previous year, lowering the utility of all fishing
nations. Without an agreement, nations will eventually reduce the stock of fish to near zero. This
will cause the fishing industry to disappear, lowering economic output and reducing the well-being
of all nations.

But by cooperating, nations can divide qo by a fair amount that ensures the fishing industry will
survive (call it qfair). In the long run, this outcome is better for all participants. Unfortunately, each
nation has an incentive to fish qi > qfair, since that is their private utility-maximizing level of
production. Thus each nation has an incentive to cheat, and it is difficult to ensure cooperation.

By agreeing to fish only qfair, each nation is making a privately suboptimal choice compared to qi
since the profit realized from fishing qfair is less than that realized from fishing qi (as qi > qfair). So,
each nation is individually better off not cooperating and hoping that other nations will step up and
maintain the oceans on their own. In economics, this tendency to “slack off” is known as a free-rider
problem.

This situation is similar to the problem of negative externalities in a market. Indeed, in this case, the
privately optimal solution for each nation qi fails to take into account the negative externality of
overfishing on the nation’s neighbours. If the “cost” of reduced fish stock was paid for by each nation
when it overfished, each nation would be properly incentivized to fish the socially optimal amount.
Then, the Tragedy of the Commons problem would disappear.
How can the tragedy of the commons be avoided?
How would you react to discovering that your consumption habits are depleting natural resources?
You have two primary options: finding alternative, sustainable products and preventing
overconsumption.

Finding Alternative and Sustainable Products

To drive change and avoid the tragedy of the commons, it’s important to boycott the products or
brands causing the alleged harm and search for alternatives. Finding sustainable options, rather than
carrying on with what Sustainable Business Strategy Professor Rebecca Henderson calls, “business
as usual,” directly addresses the impact of your consumption habits. Unfortunately, this response
has not grown in popularity, since many consumers feel boycotting a product won’t make a large
enough impact to make a difference.

The tragedy of the Commons shows us how, without some sort of regulation or public transparency
of choices and actions associated with public goods, there's no incentive for individuals to hold
themselves back from taking too much. Individuals may even have a “use it or lose it” mentality; if
they’re aware of the inevitability that the good itself will be depleted, they may think, “I better get
my share while I still can.”

In summary, achieving equilibrium in the context of overfishing involves a combination of regulatory

measures, community involvement, and incentives for sustainable practices. Successful
management requires a coordinated effort from all stakeholders to balance individual interests with
the long-term health of the shared resource.

All is not lost in a Tragedy of the Commons scenario. One shining example of such a problem that
was overcome: is the closing of the hole in the Earth’s ozone layer that was discovered in 1985 by
Jonathan Shanklin. Nations of the world, alarmed by this discovery, cooperated and moved to
quickly ban the chlorofluorocarbons (CFCs) that were causing the problem. The ozone layer has been
steadily recovering since.