A common resource is a good that is nonexcludable but is rival in consumption. An example is the stock of fish in a fishing area, like the fisheries off the coast of New England. Traditionally, anyone who had a boat could go out to sea and catch fish—fish in the sea were a nonexcludable good. Yet the total number of fish is limited: the fish that one person catches are no longer available to be caught by someone else. So fish in the sea are rival in consumption.

Other examples of common resources include clean air, water, and the diversity of animal and plant species on the planet (biodiversity). In each of these cases the fact that the good is rival in consumption, and yet nonexcludable, poses a serious problem.

Because common resources are nonexcludable, individuals cannot be charged for their use. But the resources are rival in consumption, so an individual who uses a unit depletes the resource by making that unit unavailable to others. As a result, a common resource is subject to overuse: an individual will continue to use it until his or her marginal private benefit is equal to his or her marginal private cost, ignoring the cost that this action inflicts on society as a whole.

Fish are a classic example of a common resource. Particularly in heavily fished waters, each fisher’s catch imposes a cost on others by reducing the fish population and making it harder for others to catch fish. But fishers have no personal incentive to take this cost into account. As a result, from society’s point of view, too many fish are caught. Traffic congestion is another example of overuse of a common resource. A major highway during rush hour can accommodate only a certain number of vehicles per hour. Each person who decides to drive to work alone, rather than carpool or work at home, causes many other people to have a longer commute; but there is no incentive for individual drivers to take these consequences into account.

In the case of a common resource, as in the earlier examples involving marginal external costs, the marginal social cost of your use of that resource is higher than your marginal private cost, the cost to you of using an additional unit of the good. Figure 76.3 illustrates this point. It shows the demand curve for fish, which measures the marginal private benefit of fish (as well as the marginal social benefit because there are no external benefits from catching and consuming fish). The figure also shows the supply curve for fish, which measures the marginal private cost of production in the fishing industry. We know that the industry supply curve is the horizontal sum of each individual fisher’s supply curve—quivalent to his or her marginal private cost curve. The fishing industry supplies the quantity Q_MKT at which its marginal private cost equals the price. But the efficient quantity is Q_OPT, the quantity of fish that equates the marginal social benefit (as indicated by the demand curve) to the marginal social cost, not to the fishing industry’s marginal private cost of production. Thus, the market outcome results in overuse of the common resource.

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As we noted, there is a close parallel between the problem of managing a common resource and the problem posed by negative externalities. In the case of an activity that generates a negative externality, the marginal social cost of production is greater than the marginal private cost of production, the difference being the marginal external cost imposed on society. Here, the loss to society arising from a fisher’s depletion of the common resource plays the same role as the external cost when there is a negative externality. In fact, many negative externalities (such as pollution) can be thought of as involving common resources (such as clean air).

Because common resources pose problems similar to those created by negative externalities, the solutions are also similar. To ensure efficient use of a common resource, society must find a way to get individual users of the resource to take into account the costs they impose on others. This is the same principle as that of getting individuals to internalize a negative externality that arises from their actions.

There are three principal ways to induce people who use common resources to internalize the costs they impose on others:

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The first two solutions overlap with the approaches to private goods with negative externalities. Just as governments use Pigouvian excise taxes to temper the consumption of alcohol, they use alternative forms of Pigouvian taxes to reduce the use of common resources. For example, in some countries there are “congestion charges” on those who drive during rush hour, in effect charging them for the use of highway space, a common resource. Likewise, visitors to national parks in the United States must pay an entry fee that is essentially a Pigouvian tax.

A second way to correct the problem of overuse is to create a system of tradable licenses for the use of the common resource, much like the tradable emissions permit systems designed to address negative externalities. The policy maker issues the number of licenses that corresponds to the efficient level of use of the good. For example, hundreds of fisheries around the world have adopted individual transferable quotas that are effectively licenses to catch a certain quantity of fish. Making the licenses tradable ensures that the right to use the good is allocated efficiently—that is, those who end up using the good (those willing to pay the most for a license) are those who gain the most from its use.

But when it comes to common resources, often the most natural solution is simply to assign property rights. At a fundamental level, common resources are subject to overuse because nobody owns them. The essence of ownership of a good—the property right over the good—is that you can limit who can and cannot use the good as well as how much of it can be used. When a good is nonexcludable, in a very real sense no one owns it because a property right cannot be enforced—and consequently no one has an incentive to use it efficiently. So one way to correct the problem of overuse is to make the good excludable and assign property rights over it to someone. The good now has an owner who has an incentive to protect the value of the good—to use it efficiently rather than overuse it. This solution is applicable when currently nonexcludable goods can be made excludable, as with the privatization of parks and even roads, but it cannot be applied to resources that are inherently nonexcludable, including the air and flowing water.