A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.

In Part 1: Description of the Commons, I provided a definition of the commons, together with graphical depictions of commons situations. I also defined the concept of Common Heritage of Mankind.

Now that we have a clear definition of the types of situations we're dealing with, we can move on to trying to figure out how to manage them.

Part 2: Methods of Managing the Commons

The commons represent situations of market failure, due to the presence of negative externalities. Left to their own devices, free markets associated with use of the global commons will generally result in situations of overuse, relative to the socially efficient level. Historically, economists have proposed various forms of public intervention into the free markets to better manage the commons, including the imposition of taxes or quotas or the designation of property rights.

Quotas and Taxes

One approach governments have taken in attempt to mitigate the overuse of the commons is to establish limits or quotas on use. However, such restrictions often lead parties to “employ excessively expensive methods” to reach their allowed limits or quotas, leading to socially inefficient costs. In “The Problem of the Commons: Still Unsettled after 100 Years”, Robert N. Stavins describes this problem as it relates to government imposition of limits on fisherman.

The most frequent regulatory approach [to managing the renewable natural resources] has been to limit annual catches (with the target typically being the maximum sustainable yield, not the efficient level of effort) through restrictions on allowed technologies, closure of particular areas, or imposition of limited seasons. These regulatory approaches have the effect of raising the marginal cost of fishing effort …

Marginal costs increase because each new constraint causes fishermen to reoptimize. In response to constraints on technology, areas, or season, fishermen employ excessively expensive methods (overcapitalization) to catch a given quantity of fish. Technology constraints can lead to the employment of more labor; area closures can lead to the adoption of more sophisticated technologies; and reduced seasons result in the use of more boats. Although the harvest may be curtailed as desired, the net benefits to the fishery are essentially zero. Costs go up for fishermen (as resources are squandered). Social efficiency is not achieved, nor is it approached.

As an alternative to limits or quotas, governments have also tried imposing taxes on users to decrease their use of commons down toward efficient levels. These types of taxes are known as Pigouvian taxes, named after the economist, Arthur Pigou, who developed the concept of using taxes to address problems of overuse associated with the existence of externalities. Stavins describes the use of Pigouvian taxes as applied to fisheries.

From an economic perspective, the most obvious way of assuring that harvest levels are maintained at an efficient level while providing incentives for cost reductions is a tax on fish harvests…this approach is efficient, because rather than destroying the rents through higher resource costs, the tax transfers the rents from the private to the public sector. Hence, the social net benefits of the tax approach are identical to those under the efficient outcome.

There is a problem, however. For the fishermen, these transfers are very real costs. The rent that would be received by a sole owner is received by the government instead.

So while the use of limits and quotas have the potential to decrease the propensity for overuse of the commons, neither method is ideal: quotas can lead to excessive costs, while taxes involves transferring rents from private parties to the government.

Designation of Property Rights

Alternative means of managing the commons that have the potential to lead to efficient levels of use while avoiding excessive costs or rent transfers involve the use of property rights.

Individual Transfer Quotas

One form of property rights used to manage the commons is a system of individual transfer quotas (ITQs), also known as cap and trade. Under a system of ITQs, users are assigned the right to a specified quantity of “use” of the commons. Users are then able to buy or sell these rights to or from other users; that is, it is the users who retain any rents associated with use of the permits. ITQs have been used to manage, for example, resource extraction (e.g., fisheries) and pollution (e.g., carbon dioxide, sulphur dioxide, nitrous oxide). Stavins describes how ITQ systems work:

… [A] system of individual transferable quotas (ITQs), by which the government sets the overall, annual allowable catch (equal to the efficient catch for the fishery), allocates this catch to fishermen in the form of quotas that entitle holders to catch a specified quantity of fish per year, and allows the fishermen to transfer (buy and sell) the quotas... in the context of tradable “pollution allowances,” the quotas in the fishery will flow to those that gain the most net benefit from them due to lower costs. Hence, cost-reducing technologies and management are encouraged (as with a tax), but rents are retained by the fishing industry.

The problem with ITQ systems is that there is the potential either (i) for users to engage in rent-seeking behavior with respect to the initial allocation of rights, or alternatively, (ii) for government to receive the rents associated with imposed limits on use of the commons by selling, as opposed to granting, the rights to users.

Private Property Rights

Alternative to the use of ITQ systems, other property rights to use of the commons may be established. The use of property rights to manage situations in which there are externalities (i.e., the commons) was developed by Ronald Coase in his groundbreaking analysis “The Problem of Social Costs”. More specifically, Coase redefined situations in which externalities exist as problems with “ill-defined property rights.” According to the Coase Theorem, once the property rights become well-defined, then, if transaction costs are relatively low, bargaining will lead to an efficient outcome. Terry L. Anderson and J. Bishop Grewell, in “Property Rights Solutions for the Global Commons: Bottom-Up or Top-Down?” describe the Coasean perspective in more detail.

Coase did not think in terms of externalities, but rather considered pollution and clean air (or water, forests, wildlife habitat) as conflicting or alternative resource uses for which there is competition.

…

The focus on competing uses rather than on social costs necessitates resolving an important question: who has the property rights to a scarce resource? ... Thus, the Coasean perspective defines environmental problems not in terms of externalities, but rather as problems brought about by ill-defined property rights.

The assignment of private property rights – that is, a Coasean solution – will be an effective system of managing the commons when the costs of defining, monitoring, and enforcing property rights are sufficiently low relative to the benefits of asserting those rights.

Coase won the Nobel Prize in Economics in 1991 in part for his work on the use of property rights in situations in which externalities occur.

Anderson and Grewell sum up the situation succinctly:

In order for a system of bargaining to resolve conflicting resource uses, property rights to the resource in question must be defined, divestible, and defensible.

3-D Property Rights

This brings up the notion of 3-D property rights. In “Grasping for the Heavens: 3-D Property Rights and the Global Commons”, Bruce Yandle describes in more detail how property rights to the commons evolve.

Starting with the commons, the story of how property rights evolve for particular resources begins when the commons becomes crowded and resources become scarce. For rights evolution to unfold at this point of meaningful scarcity, interested parties first must be able to identify, measure, and monitor in acceptable ways the resource or resource characteristic that matters to them. Then, the benefits of doing so must be worth the cost of making the identification. Taking this step yields the first “D” in 3-D property rights. That is, rights to the resource or resource characteristic—the thing that matters to people—are technically definable...

The next step in the evolutionary process, common property, arrives when leadership emerges from various struggling groups and encloses parts of the commons, by rule or by fence, for a particular group’s exclusive, but undivided, use. In that way, a system of feudal property emerges. If the enclosure can be monitored and made economically secure, the second “D” in 3-D property rights emerges. That is, the newly defined common property rights are defendable; undesirable visitors can be excluded...

At this point in the process, an institutional choice is implied, and different rights may emerge... at this stage in the evolutionary process, the Common Property rights that have emerged can become:

(1) Public Property, with government agents managing the resource in question;

(2) Regulatory Property, with government agents allocating and managing inalienable rights; or

(3) Private Property, with private parties allocating, managing, and transferring rights in the benign light of government. If private rights emerge and become alienable by strictly private agreement, then the last of the 3-D characteristics has evolved. The rights are divestible or transferable.

Yandle makes two additional noteworthy points about the assignment of property rights in the commons. First, the imposition of restrictions on output associated with preventing overuse of the commons creates large rents and thus rent-seeking behavior:

… [A]voiding the tragedy of the commons inevitably means imposing restrictions on output…output restriction will produce massive amounts of appropriable special interest wealth.

And second, the ability to transform the commons into private property hinges on the ability to monitor use of the commons in a low cost manner:

… [L]ow-cost monitoring technology must form the necessary bridge that connects non-transferable common property to private property with 3-D rights.

Bottom-Up vs. Top-Down Property Rights

The private property rights that evolve as per the description in the previous section are bottom-up property rights. That is, they evolve at the micro level as private parties negotiate with each over scarce resources to achieve an efficient outcome.

In contrast, there are also top-down property rights, which are regulatory property rights imposed by the government. According to Anderson and Grewell, top-down property rights may be implemented under two scenarios. First, a top-down property rights scenario may evolve if transaction (bargaining, monitoring, and enforcement) costs are too high to make a private property rights system viable. And second, a top-down property rights system might be implemented in the case of rent-seeking behavior on the part of private parties.

A case study described in Anderson and Grewell highlights the difference between bottom-up and top-down property rights.

Due to population pressures, Japan underwent a construction boom in the 1960s, and tall buildings constructed close to residential homes obstructed light that previously came to those homes. This high-rise construction caused an upsurge in disputes concerning access to sunlight falling upon property owners’ premises. These disputes were widespread, because access to sunlight was being curtailed in a country that already viewed solar access as quite valuable.

Since the Japanese national government was slow to tackle the issue of sunlight obstruction, local governments, which dealt with sunshine disputes on a daily basis, adopted sunshine guidelines to protect residents’ access to light. These sunshine guidelines assigned light rights (or protection from shadows) to the owners of individual parcels of land…

These 3-D light rights forced builders to initiate negotiations with residents if the developers wished to secure airspace in order to construct a building…

Since Japanese sunshine rights required developers to gain unanimous support of affected residents, the process of obtaining light rights from landowners was costly and slow, requiring developers to bear high transaction costs. With each affected landowner holding veto power, landowners raced to be last in the negotiating process in order to increase their bargaining power with developers. This phenomenon is known as the holdout problem.

Chaffing at the prospects of dealing with holdouts who theoretically could obtain all the rents associated with a planned high-rise building, Japanese developers turned to the national government and obtained statutes and regulations, abrogating local sunshine guidelines. The national government adopted a statute whereby the government regulates the “emission” of shadows extending beyond a building site rather than requires a builder to secure a certain amount of sunshine for adjacent homes. In this way, the Japanese government decided to regulate building construction through a shadow “emission” standard rather than to assign property rights to sunlight for homeowners. Private property rights to sunlight were converted to regulatory property rights. Special interests, the developers, were able to effect this change, overriding private law markets and institutions, by using political power to provoke the national sovereign to act.

As for the use of government-instigated property rights at the international level, Anderson and Grewell indicate that such a system is likely to induce rent-seeking behavior by parties interested in capturing the redistributed wealth associated with the re-assignment of property right. Also, monitoring and enforcement of property rights at the international level may be costly, especially if enforcement requires military action. On the other hand, compliance may very well be achieved through peaceful means, such as by imposing trade sanctions.

Elinor Ostrom: Collective Action

The systems discussed thus far for managing the commons – the use of quotas and taxes and the imposition of property rights – all require that a higher authority step into the situation (use of the commons) and impose regulations. Is there perhaps another means of managing the commons that is not dictated by an external party, one that enables the parties to the situation (users of the commons) to come to an agreement to manage themselves? This is the question that Elinor Ostrom asked.

Ostrom noted that analyses of managing the commons tended to posit the problem in one of three ways: (i) a tragedy of the commons, in which Hardin asserts that “Freedom in a commons brings ruin to all”; (ii) a prisoner’s dilemma, in which the herdsmen in Hardin’s scenario are led to defect, rather than cooperate; or (iii) the logic of collective action, in which users who cannot be excluded from using the commons tend to make no effort to support them. All three methods of positing the problem involve a free-rider problem. From Elinor Ostrom, “Governing the Commons: The Evolution of Institutions for Collective Action”:

At the heart of each of these models is the free-rider problem. Whenever one person cannot be excluded from the benefits that others provide, each person is motivated not to contribute to the joint effort, but to free-ride on the efforts of others. If all participants choose to free-ride, the collective benefit will not be produced. The temptation to free-ride, however, may dominate the decision process, and thus all will end up where no one wanted to be. Alternatively, some may provide while others free-ride, leading to less than the optimal level of provision of the collective benefit…

What makes these models so dangerous - when they are used metaphorically as the foundation for policy - is that the constraints that are assumed to be fixed for the purpose of analysis are taken on faith as being fixed in empirical settings, unless external authorities change them… I would rather address the question of how to enhance the capabilities of those involved to change the constraining rules of the game to lead -to outcomes other than remorseless tragedies.

Ostrom distills the problem of successfully managing the commons down to a clearly defined set of issues that need to be resolved:

All efforts to organize collective action, whether by an external ruler, an entrepreneur, or a set of principals who wish to gain collective benefits, must address a common set of problems. These have to do with coping with free-riding, solving commitment problems, arranging for the supply of new institutions, and monitoring individual compliance with sets of rules.

Ostrom categorized goods based on two factors: (i) their excludability, that is, whether or not users can be excluded from consuming the good, and (ii) their subtractability or rivalry, that is, the extent to which one person’s use of the good prevents others from using that good. She then designated a certain class of goods (i.e., the commons) as common-pool resources. From Michael McGinnis and Elinor Ostrom, “Design Principles for Local and Global Commons”:

Common-pool resources (CPRs)… are defined to be natural or man-made resources in which (a) exclusion is nontrivial (but not necessarily impossible) and (b) yield is subtractable.

Investopedia adds a bit more description in its definition of common pool resource:

A resource that benefits a group of people, but which provides diminished benefits to everyone if each individual pursues his or her own self interest. The value of a common-pool resource can be reduced through overuse because the supply of the resource is not unlimited, and using more than can be replenished can result in scarcity. Overuse of a common pool resource can lead to the tragedy of the commons problem.

Figure 3 displays Ostrom’s classification in tabular form.

Figure 3

Ostrom studied various situations around the world in which resource users attempted to manage their own use of CPRs. Based on her observations and analyses, Ostrom concluded that institutions that have been developed to manage CPRs are more likely to be successful, if they exhibit eight different design principals. From McGinnis and Ostrom:

The design principles of robust CPR institutions were identified as:

1. Clearly Defined Boundaries. Individuals or households who have rights to withdraw resource units from the CPR must be clearly defined, as must the boundaries of the CPR itself.

2. Congruence between Appropriation and Provision Rules and Congruence Between Provision Rules and Local Conditions. Appropriation rules restricting time, place, technology, and/or quantity of resource units are related to local conditions and to provision rules requiring labor, materials, and/or money…

The second design principle involves two parts. The first stresses that rules affecting the distribution of costs and duties in robust CPRs are closely related to the distribution of benefits and rights. The second part stresses that the rules are tailored to fit particular local circumstances.

The first part will be particularly difficult to achieve in the design of regimes where the interests of the developed and developing countries are quite diverse…

Successful efforts to control environmental problems may end up being those that are best matched to micro- or meso- level environments rather than trying to devise rules at a global level…

3. Collective-Choice Arrangements. Most individuals affected by operational rules can participate in modifying operational rules…

Sustainable global regimes must make sense at all levels of aggregation: local, regional, national, transnational, and global. Institutional arrangements at these multiple levels must be nested in such a way that the institutions at each level are robust to the type of challenges that are likely to arise at that level…

4. Monitoring. Monitors, who actively audit CPR conditions and participant behavior, are accountable to the participants or are the participants.

… [M]onitoring and sanctioning are undertaken not by external authorities but by the participants themselves in the robust institutions…

The costs of monitoring are kept relatively low in many of the long-enduring CPRs as a result of the rules-in-use… Further, since the users tend to continue monitoring the guards as well as each other, some redundancy is built into the monitoring and sanctioning system…

5. Graduated Sanctions. Participants who violate operational rules are likely to assessed graduated sanctions (depending on the seriousness and context of the offense) from other participants, by officials accountable to these participants, or by both.

6. Conflict Resolution Mechanisms. Participants and their officials have rapid access to low-cost, local arenas to resolve conflict among participants or between participants and officials.

7. Minimal Recognition of Rights to Organize. The rights of participants to devise their own institutions are not challenged by external governmental authorities.

8. Nested Enterprises. Appropriation, provision, monitoring, enforcement, conflict resolution, and governance activities are organized in multiple layers of nested enterprises…

Sustainable global regimes must make sense at all levels of aggregation: local, regional, national, transnational, and global. Institutional arrangements at these multiple levels must be nested in such a way that the institutions at each level are robust to the type of challenges that are likely to arise at that level.

Thomas Dietz, Elinor Ostrom, Paul C. Stern present additional requirements for institutions that successfully manage the commons in  “The Struggle to Govern the Commons”:

Requirements of Adaptive Governance in Complex Systems

Providing information. Environmental governance depends on good, trustworthy information about stocks, flows, and processes within the resource systems being governed, as well as about the human-environment interactions affecting those systems…

Dealing with conflict. Sharp differences in power and in values across interested parties make conflict inherent in environmental choices. Indeed, conflict resolution may be as important a motivation for designing resource institutions as is concern with the resources themselves…

Inducing rule compliance. Effective governance requires that the rules of resource use are generally followed, with reasonable standards for tolerating modest violations…

Providing infrastructure. Infrastructure, including technology, determines the degree to which a commons can be exploited, the extent to which waste can be reduced in resource use, and the degree to which resource conditions and the behavior of humans users can be effectively monitored… Effective communication and transportation technologies are also of immense importance…

Be prepared for change. Institutions must be designed to allow for adaptation

In 2009, Einor Olstrom became the first female economist to win the Nobel Prize, for her work on managing common pool resources.

Before moving on to the case of outer space, I thought I’d provide a handy summary of the current state of oversight of the deep seabed, Antarctica, and outer space, compliments of Bo Min Kim, “Governance of the Global Commons: The Deep Seabed, the Antarctic, Outer Space.”

Figure 4

Go To Part 3: The Case of Outer Space