The Treasury

Global Navigation

Personal tools

You are here: Home > Publications > Media Statements, Speeches and Guest Lectures > Guest Lectures by Visiting Academics > Professor Gary Libecap - Property Rights and Common Pool Resources

 

Guest Lecture: Professor Gary LibecapProperty Rights and Common Pool Resources

Page updated 20 Sep 2007

Slides from Professor Gary Libecap's Guest Lecture presented at the Treasury on 08 October 2004.

Professor Gary Libecap

University of Arizona

Presentation Slides

Managing the Commons: Institutional Responses for Resource Management

Outline of the Presentation
  • The Common Pool Problem.
  • The ‘Tragedy of the Commons.’
    • Transaction costs in explaining nature and timing of response or lack of response.
  • Bargaining problems.
    • Size and distribution.
    • Coordination. Enforcement. Measurement.
    • Characteristics of resources.
  • Examples. Transaction costs. Policy responses.
  •      Fisheries.
  •      Oil and water.
  •      Dust Bowl.
  • Conclusion. Emphasis on policy responses that lower transaction costs and allow for private bargaining.

Common Pool Problem

Open Access Losses
  • Most critical environmental and resource problems arise from common-pool externalities - open access losses.
  • Over fishing, over harvest of forest, over grazing, over extraction, excessive air and water pollution.
Private and Social Returns
  • Private and social net gains from resource use differ, high exploitation relative to some social optimum.
  • Waste of various types - under investment, less trade, depletion, plunder.
The Tragedy of the Commons
  • Garrett Hardin, 1968, The Tragedy of the Commons: "Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit - in a word that is limited. Ruin is the destination toward which all men rush, each pursuing his own best interest..."
  • Hardin's solution; "mutual coercion [of individual behavior], mutually agreed upon" to escape the ‘horror of the commons.’
  • Implies a Coasian solution, not developed.
Transaction Costs and Remedies to Losses of the Commons
  • Persistence of commons problems implies that there are transaction costs with the solutions.
  • A variety of remedies and timing.
  • Key to understanding variation is investigation of the costs underlying efforts to reduce the losses of the common pool.
  • Lowering these transaction costs to facilitate private bargaining can be a valuable focus of public policy.
Transaction Costs (Cont'd)
  • Transaction costs: search, negotiation, measurement, enforcement costs - all information costs.
  • Affect private and political solutions to the commons and in allocating the associated costs and benefits. Sharing rules.
  • Avoiding losses is motivation for a cooperative solution to common pool externalities. Sharing issues become key.
Injustice or Ruin?
  • Hardin optimistically asserted that "injustice is preferable to total ruin."
  • ‘Total ruin’ not equally obvious to all parties; disagree on magnitude, need to take corrective action, timing, appropriate form of intervention, and most critically, the allocation of the costs and benefits involved. Who? How much?
  • These disputes affect the timing and nature of the solution.
Timing of Action
  • As Hardin recognized, the commons can be tolerated so long as the losses are small, but as they rise, there can be a coalescing of opinions about the importance of taking action.
  • The size of the total benefits of action swamp distributional concerns.
  • Maybe late.
Bargaining Problems
  • Remedies: some parties have their access and use restricted.
  • Compare benefits of collective action with the status quo. May prefer no or delayed action, even in the face of substantial aggregate social losses.
  • Differences in the assessment of the total benefits and costs of taking action, which parties would be affected, the size and distribution of benefits and costs (including compensation payments), and enforcement.
Bargaining Problems (Cont'd)
  • Disputes delay action - waste continues.
  • Disputes mold the property rights or regulatory regimes adopted. Little resemblance to more idealized solutions (no comparison with ‘nirvana’ solutions).
  • Coase--in some cases it may be efficient to leave the commons uncontrolled, "...it may cost too much to put the matter right."
Bargaining Problems (Cont'd)
  • Literature (Buchanan and Stubblebine, Coase, Cheung, Dahlman).
  • Coase--beneficial trades will be blocked or molded by transaction costs.

Remedying the Common Pool

Factors That Influence the Costs of Remedies for the Common Pool
1. Nature and distribution of information about the resource.
  • A lack of knowledge about the resource: uncertainty about size and distribution of the benefits and costs of addressing the common pool.
  • Difficult to calculate individual gains from institutional change and to address claims for compensation.
  • Opportunism.
Factors That Influence the Costs of Remedies for the Common Pool (Cont'd)
2. Physical characteristics and value of the resource.
  • Larger, more mobile, unobservable resources-higher measurement and enforcement costs.
  • Cheating reduces the incentive of all parties to adhere.
  • More valuable resources the greater the costs and the returns of bargaining for institutional change.
Factors That Influence the Costs of Remedies for the Common Pool (Cont'd)
3. Number and heterogeneity of the bargaining parties.
  • The larger the number and the more heterogeneous are the agents, the greater the costs of agreement on remedies and the distribution of the costs and benefits.
  • Small groups of similar agents with a history of interaction can usually agree on community management.
  • Shifts in prices and technology invite entry and new competition.
Factors That Influence the Costs of Remedies for the Common Pool (Cont'd)
4. Equity and Precedent. Past use or ownership arrangements may be disrupted.
  • Compensation claims.
  • Standing. Issues of who will pay, how much, nature, who will receive.
  • Nature of the side payment can affect the institutional response to the commons.
  • Cash may be too transparent to be politically acceptable.
  • Alternative arrangements that may otherwise seem inexplicable.

The Fisheries

Institutional Solutions
  • Range of institutional solutions
  • No action, state ownership and allocation of use, regulation by administrative agencies, property rights - group, individual.
  • Generally, private property rights are attractive because they best align individual incentives.
  • State can reduce the costs of transacting among agents in order to facilitate private solutions. Elaboration below.
Common Pool Losses
  • Wild ocean fisheries are classic common-pool resources.
  • Few restraints on entry, over fishing, and stock depletion.
Transaction Costs Issues
  • The fugitive nature of off shore species, large distances, multiple political jurisdictions prevent private property rights and blocked effective government controls.
  • Limited and asymmetric information about
  • Stock size.
    • Effect of fishing and other natural factors; response to regulatory controls.
    • Available information disputed by regulators or fishers and interpreted differently.

  • Heterogeneity among fishers
    • Size, production cost, skill, and fishing history--different expectations regarding the benefits and costs of regulation.
    • Distributional conflicts raise the costs of regulation and influence the timing and policies that are adopted.
Historical Responses
  • Deny access to certain groups - non citizens, commercial relative to sports, inshore relative to offshore, large relative to small boat owners.
    • Reduces pressure, but does not solve the problem.
    • New entry and depletion by group members.
  • Fixed seasons or gear restrictions.
    • Do not upset status quo rankings and minimize on transaction costs.
  • Regulations did not align the incentives of fishers with protection of the stock.
    • Generally have been unsuccessful.
Productive Policy Response
  • Policy that reduces the costs of bargaining - ITQs. Basis for exchange.
  • Valuable use rights that can be exchanged and accumulated by the most productive.
  • Better for aligning incentives than other regulations.
  • Controversial - must be limited; grant wealth windfalls; distributional conflicts.

Oil and Water

Oil Pool
  • Competitive extraction under the rule of capture.
    • Incentives to maximize the economic value of individual holdings rather than the reservoir as a whole.
    • Rapid extraction, excessive capital investment, lost output, other waste.
  • Information problems about value of individual leases.
    • Strategic production under open access.
    • Large numbers.
    • Heterogeneous holdings of oil and natural gas, size, and cost.
  • Limit private agreement to control Losses.
Historical Responses
  • State regulation of production.
    • Compromise - exemptions to spacing and drilling rules.
    • Improvement over open access, but not an idealized alternative (Demsetz).
  • Unitization.
    • Most complete solution, but difficult--6 years or more to agree, information problems, valuation, bilateral monopoly.
    • To effectively address, the cost and sharing rule has to have a particular form.
    • Prudhoe Bay.
Productive Policy Response
  • Prorationing
    • Production controls.
    • Tradable quotas.
  • Compulsory unitization legislation.
    • Avoid unanimity; limit hold outs. Speed agreement.
    • Reduce costs of bargaining.
    • Can be controversial welfare effects.
Water
  • Water rights transfers: agriculture to urban and environmental uses.
    • 60-80% of water in agriculture.
    • Transfer complicated by valuation - value of properties to be purchased - ‘share’ of the benefits; bi-lateral monopoly.
    • 3rd party effects. Community impact and compensation. Measurement. Standing.
  • Protection of instream flows.
Productive Policy Responses
  • Water marshal to lower bargaining costs with irrigation districts.
    • Valuation.
    • Standing and compensation with 3rd party effects.
    • Outside party to require action.
  • Legal change to broaden ‘beneficial use’ designation to include instream flows.

Dust Bowl

Commons Problem
  • Excessive cultivation by small farmers. Wind erosion.
  • Little incentive to privately invest in erosion control. Down wind externalities.
  • Numbers too large for collective action.
  • High transaction costs for joint erosion control.
  • Result: 1930s Dust Bowl.
Productive Policy Response
  • Formation of soil conservation districts.
  • Lower costs of bargaining.
  • Group solution - investment in erosion control.
  • Penalties for failure to participate.
  • Successful. No similar wind erosion in 1950s and 1970s drought.

Conclusion

Transaction Costs Matter
  • Transaction costs affect nature and timing of solutions to common pool losses.
  • Examine the bargaining issues - variation, timing, policy.
  • Property rights are generally the preferred solution because of their flexibility and alignment of incentives. But not always possible. Costs of measurement, enforcement, equity.
  • Role of the state - reduce bargaining costs - ITQs; mandatory unitization laws; water marshals and beneficial use rulings; soil conservation districts; tradable pollution permits.
  • Avoid ‘nirvana’ comparisons.

Page top