The Efficient Use and Maintenance of a Common Resource

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 of getting individual users of the resource to take into account the costs they impose on other users. This is basically the same principle as that of getting individuals to internalize a negative externality that arises from their actions.

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

Like activities that generate negative externalities, use of a common resource can be reduced to the efficient quantity by imposing a Pigouvian tax. For example, some countries have imposed “congestion charges” on those who drive during rush hour, in effect charging them for use of the common resource of city streets. Likewise, visitors to national parks must pay a fee, and the number of visitors to any one park is restricted.

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 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. 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.

As the following Economics in Action shows, a system of tradable licenses, called individual transferable quotas or ITQs, has been a successful strategy in some fisheries.

!worldview! ECONOMICS in Action: Saving the Oceans with ITQs

Saving the Oceans with ITQs

The world’s oceans are in serious trouble. According to a study by the International Program on the State of the Oceans, there is an imminent risk of widespread extinctions of multiple species of fish. In Europe, 30% of the fish stocks are in danger of collapse. In the North Sea, 93% of cod are fished before they can breed. And bluefin tuna, a favorite in Japanese sushi, are in danger of imminent extinction.

Not surprisingly, the principal culprit is overfishing. The decline of fishing stocks has worsened as fishermen trawl in deeper waters with their very large nets to catch the remaining fish, unintentionally killing many other marine animals in the process.

The fishing industry is in crisis, too, as fishermen’s incomes decline and they are compelled to fish for longer periods of time and in more dangerous waters in order to make a living.

Will ITQs help save the North Sea’s cod?
Vlada Z./Shutterstock

But, individual transferable quotas, or ITQs, may provide a solution to both crises. Under an ITQ scheme, a fisherman receives a license entitling him to catch an annual quota within a given fishing ground. The ITQ is given for a long period of time, sometimes indefinitely. Because it is transferable, the owner can sell or lease it.

Researchers who analyzed 121 established ITQ schemes around the world concluded that ITQs can help reverse the collapse of fisheries because each ITQ holder now has a financial interest in the long-term maintenance of his particular fishery.

ITQ schemes (also called catch-share schemes) are common in New Zealand, Australia, Iceland, and increasingly in the United States and Canada. (The quota share program for Alaska crab fishing that we analyzed in Chapter 5 is an example of an American ITQ.) The Alaskan halibut fishery is one example of a successful ITQ scheme. When it was implemented, the annual fishing season had shrunk from four months to two or three days, resulting in dangerous races by the boats. Now the season lasts nearly eight months. Steve Gaines, Director of the Marine Science Institute at the University of California at Santa Barbara says, “Halibut fishermen were barely squeaking by—but now the fishery is insanely profitable.”

Quick Review

  • A common resource is rival in consumption but nonexcludable.

  • The problem with common resources is overuse: a user depletes the amount of the common resource available to others but does not take this cost into account when deciding how much to use the common resource.

  • Like negative externalities, a common resource can be efficiently managed by Pigouvian taxes, by the creation of a system of tradable licenses for its use, or by making it excludable and assigning property rights.

17-3

  1. Question 17.4

    Rocky Mountain Forest is a government-owned forest in which private citizens were allowed in the past to harvest as much timber as they wanted free of charge. State in economic terms why this is problematic from society’s point of view.

  2. Question 17.5

    You are the new forest service commissioner and have been instructed to come up with ways to preserve the forest for the general public. Name three different methods you could use to maintain the efficient level of tree harvesting and explain how each would work. For each method, what information would you need to know in order to achieve an efficient outcome?

Solutions appear at back of book.