The establishment and protection of privately owned property are considered the defining roles of government and the foundation of modern economies. The 17th-century political philosopher John Locke wrote that the fundamental purpose of government was to elevate people from their natural state and ensure their right to life, liberty, and property. Indeed, one solution to Hardin’s Tragedy of the Commons is to distribute property to individuals, who will therefore have an economic incentive to maintain the integrity of that resource.

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The vicuña (Vicugna vicugna) is the wild cousin of the llama and alpaca. It lives in the highlands of South America and is prized for its wool. After the arrival of Europeans in the region, vicuña were treated as an open-access resource and their populations were decimated by hunting. In the late 1960s and early 1970s, regulations were put in place to protect the animals by banning all national and international trade in vicuña products. Although vicuña populations began recovering as a result of the reduction in hunting, their former grazing lands were now overrun by domesticated llamas and alpacas. Locals could own domesticated llamas and alpacas and therefore benefit from them.

Vicuña, on the other hand, provided no economic benefit. In 1979 the Vicuña Convention authorized a tightly regulated trade in vicuña wool, which allowed locals to harvest wool and sell the wool without killing the animals. In Argentina and Chile, vicuña were considered private property and raised in captivity by individual families. In Peru and Bolivia, local communities engaged in periodic round-ups, where they sheared and released the vicuña, and shared in the profits. It turned out that giving ownership of the vicuña, or their wool, to the people fostered the survival of the species: Between 1969 and 2001, the vicuña population increased from 14,500 to 227,500.

Few environmental issues are as emotional as freshwater use rights in the western United States. Economic growth is limited by freshwater availability, but freshwater is a limited resource that depends on climate, geology, and ecosystems. Allocation of water in western rivers is governed by treaties and compacts that date back more than a hundred years, when water was far more plentiful than it is today. Unlike goods on the free market, the price that farmers and city-dwellers pay for water does not increase as the availability of water declines. It is set by local utilities and water management agencies. Moreover, people who dig their own wells and install their own pumps often have to pay nothing at all, even though they may be tapping into an aquifer shared by their neighbors. Overexploitation of freshwater resources is another example of a Tragedy of the Commons.

Cities facing water shortages often resort to command-and-control regulations, such as strict regulations about watering lawns and penalties for individuals who exceed water use quotas. Facing a drought in May 2014, the City of Santa Cruz, California, enacted such a measure for water use. Single-family homes were allowed to use 249 gallons per day with hefty penalties for those exceeding the limits.

Many economists believe that such command-and-control approaches would be unnecessary and water use more sustainable if farmers and residents were able to buy and sell their rights to water on a free market. Using such a market-based approach, water allocations could be traded among residents and the price of water would fluctuate with supply and demand. Because water would suddenly become more valuable to farmers, they might be more willing to invest in technologies such as drip irrigation to reduce their water use and sell their excess to municipalities. Meanwhile, residents who are willing to pay more for a green lawn in summertime can do so by paying the market price for the water they use.

One of the advantages of market-based strategies over command-and-control regulations or Pigovian taxes is that policy makers only have to set the overall goal for water use and do not need to identify a penalty or tax schedule. The market will establish the appropriate price for water. Taking a market-based approach to managing water may in many cases require provisions to protect the public interest in, for example, maintaining wetlands and fish habitat. Such an approach has never been implemented for water, but tradable quotas have proven successful in reducing sulfur-dioxide pollution (Chapter 13)—which caused acid rain—and reducing overfishing (Chapter 8).