What is common to many is taken least care of, for all men have greater regard for what is their own than for what they possess in common with others. — Aristotle
The rules pay you to do the wrong thing. — Garrett Hardin
The Tragedy of the Commons is a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole.
Garrett Hardin, introduces us to the The Tragedy of the Commons:
Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons. Such an arrangement may work reasonably satisfactorily for centuries because tribal wars, poaching, and disease keep the numbers of both man and beast well below the carrying capacity of the land. Finally, however, comes the day of reckoning, that is, the day when the long-desired goal of social stability becomes a reality. At this point, the inherent logic of the commons remorselessly generates tragedy.
As a rational being, each herdsman seeks to maximize his gain. Explicitly or implicitly, more or less consciously, he asks, “What is the utility to me of adding one more animal to my herd?” This utility has one negative and one positive component.
1) The positive component is a function of the increment of one animal. Since the herdsman receives all the proceeds from the sale of the additional animal, the positive utility is nearly +1.
2) The negative component is a function of the additional overgrazing created by one more animal. Since, however, the effects of overgrazing are shared by all the herdsmen, the negative utility for any particular decision-making herdsman is only a fraction of 1.
Adding together the component partial utilities, the rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another; and another. . . . But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit–in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all.
Greg Mankiw, in his Microeconomics text says:
Consider life in a small medieval town. Of the many economic activities that take place in the town, one of the most important is raising sheep. Many of the town's families own flocks of sheep and support themselves by selling the sheep's wool, which is used to make clothing.
As our story begins, the sheep spend much of their time grazing on the land surrounding the town, called the Town Commons. No family owns the land. Instead the town residents own the land collectively, and all the residents are allowed to graze their sheep on it. Collective ownership works well because land is plentiful. As long as everyone can get all the good grazing land they want, the Town Common is not a rival good and allowing residents' sheep to graze for free causes no problems. Everyone in the town is happy.
As the years pass, the population of the town grows and so does the number of sheep grazing on the Town Commons. With a growing number of sheep and a fixed amount of land, the land starts to lose its ability to replenish itself. Eventually, the land is grazed so heavily that it becomes barren. With no grass left on the Town Common, raising sheep is impossible, and the town's once prosperous wool industry disappears and, tragically, many families lose their source of livelihood.
What causes the tragedy? Why do the shepherds allow the sheep population to grow so large that is destroys the Town Common? The reason is that social and private incentives differ. Avoiding the destruction of the grazing land depends on the collective action of the shepherds. If the shepherds acted together, they could reduce the sheep population to a size that the Town Common could support. Yet no single family has an incentive to reduce the size of its own flock because each flock represents only a small part of the problem.
In essence, the Tragedy of the Commons arises because of an externality. When one family's flock grazes on the common land, it reduces the quality of the land available for other families. Because people neglect this negative externality when deciding how many sheep to own, the result is an excessive number of sheep.
If the tragedy had been foreseen, the town could have solved the problem in various ways. It could have regulated the number of sheep in each family's flock, internalized the externality by taxing sheep, or auctioned off a limited number of sheep grazing permits. That is, the medieval town could have dealt with the problem of overgrazing in the way that modern society deals with the problem of pollution.
In the case of land, however, there is a simpler solution. The town can divide up the land among town families. Each family can enclose its allotment of land with a fence and then protect it from excessive grazing. In this way, the land becomes a private good rather than a common resource. This outcome in fact occurred during the enclosure movement in England in the 17th century.
The Tragedy of the Commons is a story with a general lesson: when one person uses a common resource, he diminishes other people's enjoyment of it. Because of this negative externality, common resources tend to be used excessively. The government can solve the problem by reducing use of the common resource through regulation or taxes. Alternatively, the government can sometimes turn the common resource into a private good.
This lesson has been known for thousands of years. The ancient Greek philosopher Aristotle pointed out the problem with common resources: ‘What is common to many is taken least care of, for all men have greater regard for what is their own than for what they possess in common with others.'
The Tragedy of the Commons is a Farnam Street Mental Model.