Opinion – Why? Economese in good Portuguese: The tragedy of the commons explains global warming, international trade and some effects of Covid

In a recent Why? text, we explained what negative externalities are, the idea that for many goods we have social (and not private) costs, but we tend to make our choices based on private calculus (that is, without taking those social costs into account).

This notion is very important in the study of environmental economics. The existence of negative externalities explains everything from small things like why people choose to consume products that cause environmental damage (such as meat) to why we have a climate emergency right now.

Let’s imagine we have a fish pond. Each year, the fish population in this lake increases. However, João, a man who lives near the lake, decides to start fishing every day and cook the fish to feed his family. Until then, so good. But suddenly, João might think that in addition to consuming the fish, he could also sell it on the market, making some profit. As the fish population continues to grow every year, this is not a problem, as what João consumes is not enough to create an imbalance in the ecosystem.

But what if everyone in the city of João starts fishing in this lake? What if everyone in your state decides to do that too? What if the whole of Brazil decides that it wants to fish these fish from the same lake as João? What will happen?

We can imagine that each year more fish will be caught than will be born, until eventually there will be none left in the lake. When that happens, João and all the other fishermen who were using the lake will be harmed. That’s because when each of them was deciding how much to catch per day, they weren’t taking into account the social cost of fishing (ie, the fact that if too many people fish the lake’s population will disappear and there won’t be any fish left for anyone). They were just thinking about the private cost, like equipment expenses, time spent on the lake, etc.

This problem is known as the Tragedy of the Commons, and it’s a didactic way of explaining what can happen to renewable natural resources when we don’t have control over who has access to them (who can fish in the lake?), we don’t have well-defined property rights (Whose fish are in the lake?) and monitoring is complex (who will monitor the action of fishermen in the lake?).

If an economist tries to answer why we have a climate emergency situation right now, the answer is this. As people and companies act by making choices without internalizing the negative externalities that products and services generate for the environment in the long run, we end up falling into a global “tragedy of the commons”. As we generally do not take into account the environmental depredation associated with our choices, we are slowly destroying ecosystems responsible for regulating the Earth’s temperature. And this situation will bring catastrophic consequences for everyone.

Another expansion of this theoretical problem appears in international trade – and it serves to explain why while some countries seem to concentrate more polluting industries, others seem to find it easier to make the transition to a “green” economy.

In an article published in the Journal of Economic Literature, Brian Copeland and M. Scott Taylor argue that some nations are bound to fall into the “tragedy of the commons” with their natural resources when they open up to trade with others. Some countries have comparative advantages for the production/extraction of certain goods (ie they will be very good at hosting polluting industries and/or industries based on intense resource extraction because they are lenient with environmental protection legislation). Others will use trade with these countries (and, therefore, the possibility of having access to goods and services that come from these industries) to specialize in clean technologies and low-carbon agriculture, and thus continue to preserve their environmental assets.

It is worth noting that the tragedy of the commons also appears several times in our daily lives. A classic example is what happened during the Covid-19 pandemic: we all remember the rush to supermarkets for alcohol gel, masks, toilet paper, etc. at the beginning of the pandemic, in the first months of 2020. Many even intended to stock these products at home, fearing that they would become scarce in the next few days.

The rapid increase in demand resulted in significant price increases, and in fact products began to run out of shelves. Result: many people with less purchasing power, or who arrived later, were left without. But the lack of access to these products is bad for everyone’s health (including those who have obtained them), because it has increased the risk of contamination for the entire society.

There are several solutions to get around the tragedy of the commons problem. In our initial lake example, the government could issue fishing licenses, correcting this market failure. Or it could put a tax on fishing, in order to incorporate the social cost into the private cost, and thus fishermen would be forced to take the externality into account when deciding how many fish to catch.

Perhaps it was even easier if fishermen themselves could agree on how many fish each could catch per day. This was one of the solutions used by merchants, putting “quotes” on how much alcohol gel their customers could buy at one time.

We will bring it in more details in upcoming texts of Why? explanations of all solutions for negative externalities. These attempts to avoid the tragedy of the commons help us to understand several important movements of the present time (such as the carbon credit market, which gained a lot of evidence in recent weeks with COP26). In these solutions lies the key to understanding also how countries can “escape” from the tragedy of the commons when they participate in international trade with other countries.