Games in Politics: Week 1 Agenda Prisoners Dilemma Tragedy of Commons Public Goods

Tragedy of Commons Game theory can be used to explain overuse of shared resources. Extend the Prisoners Dilemma to more than two players. A cow costs a dollars and can be grazed on common land.

The value of milk produced (f(c) ) depends on the number of cows on the common land. What is the problem? cost. What are the solutions? Private ownership Social rules/norms, external control If they can be enforced. Farmers dont adequately pay for their impact. Resources are overused due to inaccurate estimates of

Taxation

Try to internalize costs; accounting system needed.

Solutions require changing the rules of the game Change individual payoffs Mechanism design

These and other solutions you can find in the book Governing the commons by Elinor Ostrom, the 2009 Nobel Prize winner. . Tragedy of commons A. BASIC PROBLEM OF THE COMMONS: The incentives that the social structure of the situation provides to individuals lead them to take uncoordinated individual action that makes all of them worse off than if they coordinated their action. Or, each individual is always better off not cooperating regardless of what anyone else does, but if everyone doesnt cooperate, than everyone is worse off than if they did. B. "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." 1. Village common in England and colonial New England towns was common property and access for grazing of ones cattle was unrestricted. The first few people who graze their sheep and cows there benefit by having cows

2. Activity is individually uninhibited and individually beneficial but collectively costly. 3. Recent battle between Canadian and Spaniards over fisheries is the current expression of this age-old problem. But also problem nationally - Oregon umi fishery. C. Characteristic of commons: 1. Those who use common are affected by the overuse. Different than with externalities. Poetic justice: fishermen and fisherwomen drive themselves out of a job. 2. Assumes all actors are more or less equally capable of being consumers of the good being used, whether it be fish or clean air. 3. This not always true. Pollution problems not like this D. The simulation 1. Optimal management of a farm 2. First round done slowly and explain results screen

3. Several rounds and then see where we are, what cause is, and how might resolve it 4. Try again and see what happens E. Solution: "mutual coercion, mutually agreed upon." Works at domestic level with taxes or private property, but what about at international level where nobody to enforce 1. Elinor Ostrom of Indiana University has found numerous cases where this occurs in fishing villages in Indonesia, in farming areas in the Alps, in water distribution networks in Spain 2. Treaties. But still have incentives to use the commons, if you can avoid being caught and sanctioned for it. Indeed, often value to you goes up if everyone else shows restraint. If can fool everybody else into not grazing, then can make $40 per cow rather than $25. 3. Taxes: reduce incentives to overuse. But difficult internationally. 4. Privatization: give one actor exclusive rights to commons and they will not overexploit Aral Sea Public Goods vs. Commons

Public Good Non excludable and non rival

Example (lighthouse) Who will pay? Free-riding -> the good tends to be underprovided Commons Non excludable, but rival -> overuse, tragedy of

common

Goods
Excludable Non Excludable Rival Private Goods Common Resources Non Rival Natural Monopolies Public Goods

What are the examples?

Public Goods The main characteristic and the main problem: everyone can use public goods freely. Example of market failure:

free-riding -> private costs > private benefits As a result no incentive to provide the good The market thus fails to provide a good or service for which there is a need. What are the solutions? Assurance contracts

Governments and government-like communities. If voluntary provision doesnt work , make it involuntary: taxation Subsidies Exclusion mechanism (privileged group, club goods)