The Tragedy of the Commons and the Free Rider Problem

Aristotle noted that “What is common to the greatest number has the least care bestowed upon it.” In 1833, William Forster Lloyd observed that shepherds in England who had the right to use the village commons in an emergency reversed the formula, exhausting the commons first and only then using their own land to graze their animals.

In much of Europe, bus and tram riders buy and cancel their own tickets. Of course, some don’t buy tickets and ride free. This leads the government to hire inspectors who fine riders without tickets several times the normal price. This “Free Rider Problem” is a form of Prisoners’ Dilemma (Chapter 2). Some riders compare the price of a ticket with the amount of the fine and the chance of being caught at particular times of day in deciding whether to buy a ticket. Transportation companies make a similar calculation to decide how high to set the fines and how many inspectors to hire. Overtime parkers, speeders, and tax avoiders are among those playing the same game.

Consider a hypothetical example.⁶ You eat lunch with three friends and spend about six dollars, the average in the restaurant. Over time, the habit develops of simply splitting the tab—lunch became common rather than private property. You would enjoy having desert and coffee for four dollars more, but do not because it would cost your friends a dollar each.

Of course, this is a parable explaining why government programs become wasteful and expensive. There are only three serious solutions possible. The first is to hope individuals will work out a sensible solution among themselves. That has worked in rare cases such as Swiss hamlets where social networks are strong and populations are small. However, it breaks down quickly as the group gets larger. When a Vermont town of only 4000 made school taxes voluntary, unsurprisingly many stopped paying them. Residents divided into two bitterly opposed factions, leaving, as the Wall Street Journal headline put it, “Manchester Disunited,” a pun English football fans may enjoy. Elinor Ostrom (1990; 1994), the first woman to receive the Nobel Prize in Economics (2009), found in a study of dozens of cases of communal ownership that those that survived had some sort of property rights system. Five common elements in successful groups were (1) clear responsibilities for each person, (2) clear definitions as to who got what, (3) duties proportional to benefits, (4) an agreed method for resolving conflicts, and (5) allowing everyone a voice in setting and modifying the rules.

The second possible solution is government regulation. Americans live in a regulatory regime that most affects agriculture, consumer goods, environment, and industry but is becoming ever more invasive. Examples of regulations that have saved lives are not difficult to find: seat belt and helmet laws and fire-retardant child pajamas come immediately to mind.

Regulations have real benefits but also real costs, many hidden and hard to assess. Their effectiveness depends to a large degree on the process of defining the problem they are meant to address, peer review of reports estimating costs, benefits, and risks, identifying likely unintended consequences (Chapter 9), identifying duplication or contradictory regulations issued by other agencies, and insuring that public comments are taken seriously. If all goes well, a quality regulation will not impair “economic growth, innovation, competitiveness, and job creation,” as required by President Obama’s 2011 Executive Order guiding their development.

Skepticism is in order. By 2010, regulatory paperwork in the US cost an estimated five billion dollars a year. People ignore regulations because they are too long, the print is too small, and often they are just plain silly.⁷ Environmental regulations have proven particularly perverse, killing jobs to protect ecologically unimportant species instead of focusing on habitats, and preventing owners using their property while requiring them to pay taxes on it. Regulators tend to think the world needs more of what they do and apparently some resort to deception to achieve their ends. The US Forest Service used false data about spotted owls to block logging in California. Seven employees of the Fish and Wildlife Service distorted data to justify cutting water to Klamath River Basin farmers on behalf of suckerfish.

The third possible solution is the free market. The government could auction, assign, or sell permits to pollute after setting regional standards. Firms that produce less pollution than their permits allow could sell the excess at a profit. This gives a competitive edge to companies that pollute less by driving up the costs of those that pollute more, eventually driving the latter into reform or bankruptcy. It also motivates invention of better systems. The US implemented such a program in 1995 to cut sulfur dioxide emissions that cause acid rain. It is saving about $2 billion a year compared with the traditional regulatory approach.

The most general and productive approach probably is to combine the regulatory and market approaches in a way that takes account of the circumstances of each industry. An example of a beneficial combination would be to transform the FDA from a regulatory to an information agency. Drug companies wanting approval of particular products could ask for it. Patients who wanted to be cautious could take only FDA-approved treatments. Others, especially those with terminal illnesses, could try experimental ones without breaking the law. The best method for each particular problem depends on effectiveness and social philosophy (Scmidtz & Goodin 1998).