Efficiency and the tragedy of the Commons -N

what’s allocative efficiency

an efficient market whereby all goods and services meet the needs and wants of society

Whats Pareto efficiency

If you increase good x then because of the opportunity cost you have to decrease good y

Whos theory was the “tragedy of the commons”

Victorian economist William Foster Lloyd in 1833

what is the tragedy of the commons

The tragedy of the commons is when there is an overconsumption of a particular product/service because rational individual decisions lead to an outcome that is damaging to the overall social welfare (people being selfish and thinking about the short term effects instead of the long run

what are the assumptions of the tragedy of the commons theory

when people make decisions, people take the course of action that maximises their own utility

an example of this would be free-riding, people slowly take more and more until there is nothing left

causes of the tragedy of the commons theory

People choosing short term needs instead of looking at the bigger picture

no formal control over the use of the resource

no barriers to entry

examples

Coffee consumption

traffic congestion

use of the rainforest for agriculture

how to stop the tragedy of the commons theoretically

voluntary agreements along the lines suggested

Government regulations

Clearly defined property rights

Taxes, fines, quotas