The Free Rider Problem

The tragedy of the commons is a parable invented by Garrett Hardin (1968) as a counter-example to Adam Smith’s invisible hand. Recall that with the invisible hand, selfish actions lead to the greater good. In the case of the tragedy of the commons, selfish actions promote the “greater bad.” 

The Tragedy of the Commons

Here’s a simple version of the parable. A group of ranchers graze their cattle on a commons – public land that everyone is allowed to use. In order to maintain the long-term health of the grass, the ranchers should limit the total number of cattle to perhaps 1,000. Otherwise the cattle will overgraze and starve. However each rancher has an incentive to increase the size of their own herd. If a rancher double the size of his own herd from 10 to 20, then he'll double his profits.  And if the land can support 1000 cows then it can support 1010 cows. The problem is that all ranchers face the same incentive, so the outcome is that they all end out doubling the size of their herds. The land might be able to feed 1010 cows, but not 2,000. The grass becomes overgrazed and the cattle starve to death. That’s the tragedy of the commons. 

The Problem with the Private Property Rebuttal

Economic conservatives disagree. They claim that the real lesson of the parable is the need for private property. The commons are basically a small-scale form of communism and suffers from the same problems. Therefore the solution is capitalism and private property. Divide the commons into privately owned lots and each rancher will have an incentive to take care of his own land. If each rancher had a lot that was big enough to graze 10 cows, they wouldn't try and put 20 cows on it.

As a general rule, private property is the best solution, but not always. If you are interested, there is a pretty well-developed economic literature on commonly owned resources. Elinor Ostrom won a Nobel Prize in economics showing how social norms and local governments could effectively manage a commons without tragedy or private property. The Enclosure Laws in England also a good example. Before the Enclosure Laws the common land acted as a sort of "unemployment insurance". Peasants could hunt, forage, or graze their family livestock on common land when times were tough. Hopefully next year would be a better year on their farm. The gains from privatizing the common land were outweighed by the losses of this "unemployment insurance". But for now let's just accept that private property is the best solution. There are still many types of commons that can't be divided into privately owned lots.

The Free Rider Problem

The tragedy of the commons is an example of the Free Rider Problem. It's what happens when the pursuit of self-interest leads to the "greater bad". If you are a rancher it is in your self-interest to increase the size of your herd, but doing so it bad for the group as a whole because there is slightly less grass to go around. If all ranchers follow their self-interest, the commons will become overgrazed and everyone's cattle will starve.

It turns out the free rider problem is extremely common. It happens whenever the pursuit of self-interest is bad for the group.

• Lakes, rivers, and oceans cannot be divided up and the outcome is pollution and overfishing. We rely on government regulations to maintain fishing stock and prevent pollution.
• The atmosphere is another "commons" and the pursuit of self-interest leads to pollution in the form of acid rain and global warming.
• National Defense and other public goods suffer from the free rider problem. If everyone chipped in a society could pay for a strong military. But it is easy to be free rider and not chip in because is no way for the military to protect your neighbor but not you. So we rely on the government to force people to chip in.
• Firms are a type of "common" where the firm does well if employees work hard for the firm's benefit and the firm goes out of business if employees shirk on the job.
• Risk pools for various types of insurance are a type of common. Without government regulations insurance companies would find ways to exclude the elderly and unhealthy from getting insurance.
• Developing herd immunity for a disease. If everyone is vaccinated then the disease will not spread. But if there is a (very slight) risk of complications from a vaccine then people will be tempted to become free ride on herd immunity. But if everyone does this then we don't get herd immunity.
• Positional goods are goods where you benefit by having more than someone else. The classic example is a military arms race where two nations bankrupt each other trying to create the strongest military, but it happens with luxury goods, superstar salaries, housing and more.
• Social status is the ultimate positional good and leads to the ultimate in wasteful arms races. 
• Arms races are also common in nature. Trees are in an arms race with each other to be taller to get the most sunlight. Males in a literal arms races with each other to be bigger and stronger and get the attention of females. Economic conservatives think that the invisible hand is everywhere, but evolutionary economists see wasteful arms races everywhere.

Over the next few posts we'll look at these in more detail.