Explain how the problem of overuse of common resources can be solved

Answer 1

There are three typical ways in which the government can intervene in order to prevent the overuse of a common resource: restricting usage, creating a market for permits to use the common resource, and assigning property rights

To understand the options available to the government, consider these examinations of the ways in which each policy could be applied to the example of a popular fishing pond.

Restrict usage: The government could simply pass a law that forbids people from using the common resource to the extent that it is damaged or depleted. While restricting access will prevent overuse, it may not be socially optimal. For example, the government could say that nobody is allowed to fish in the pond. While that policy would prevent overuse, it would also not be socially optimal because some people would benefit from fishing a sustainable amount. If the government policy allowed people to fish only up to that sustainable amount, that still may not be optimal because a policy that restricts access does not guarantee that the people who are allowed to fish are the ones that value it the most.

Tradable permits: Another approach would be to find the socially optimal quantity, and then create and sell permits that allow for that usage. In the case of the fishing pond, the government could sell a limited number of fishing licenses (or permits). Whether or not a permit system is socially optimal depends on the price of the permits. The easiest way to make sure that the outcome is optimal is to allow individuals or firms to buy and sell the permits (assuming transaction costs are not prohibitive). It's important to note that when permits are tradable, then the outcome will be optimal, regardless of who initially gets the permits. This result is known as the Coase theorem.

Assign property rights: By assigning rights to a common resource, a private party is given permission to manage and exclude people from using the common resource. There are many ways to assign property rights, including granting patents or selling the common resource to a private individual or firm. As an example, the government could sell the pond to a private owner and then allow that owner to manage and sell access to fisherman. By putting a private owner in charge of the common resource, the government ensures that someone has an incentive to preserve the common resource and prevent overuse. Assigning property rights will lead to the socially optimal consumption and to consumption by people that value it the most. It's important to note that the method of assigning property rights may or may not be equitable or "fair.". For example, if the government gave ownership of the pond to a random citizen, then that person would be much better off having received that gift, while others in the population would miss out.