Public Goods, Free Riding, and Repeated Interactions

4.6 of The Economy 1.0 & The Economy #2

What entails a public good?

-A good which use by one person does not reduce its availability to others.

-To contribute means you need to pay £10. Irrigation provides a benefit of £8. Why does this graph illustrate a social dilemma and a prisoners’ dilemma?

-Kim will make more money if she doesn’t contribute than if she does. Thus, a clear dominant strategy emerges such that not contributing is the way forward. She can free ride on the contributions of others

-Therefore, a prisoners’ dilemma emerges because if other farmers act like Kim, where they act for their own monetary payoff, no one will contribute.

-Everyone would benefit if everyone cooperated, but individually, each farmer benefits by free riding.

Why is Elinor Ostrom (1933-2012) seen as a great economist?

-She cared for a central concept in economics, with little examination: property. Ostrom examined particularly where communities, not individuals or governments, held property rights.

-The wisdom then was that informal conventional ownership of resources leads to a tragedy of the commons. Ostrom made this view redundant.

Why did Ostrom stress a distinction between common property and open-access resources?

Common property: Requires a well-defined community of users who are, in practice/law, able to prevent outsiders from exploiting the resources. Inshore fisheries, forest areas, etc…

Open-access resources: Ocean fisheries, atmosphere… can be exploited without restrictions - other than those imposed by states or by international agreements.

-The reason for such a distinction was that the tragedy of the commons occurs with open-access resources, not common property.

What did Ostrom find in terms of how common property is successfully managed

-She found that the usage of costly punishment in response to mass resource extraction was a key factor

-The power of communication and the critical role of informal agreements that support cooperation.