Most mornings I am confronted with a choice of what to eat for breakfast. As a semi-rational individual, one would assume I would seek to maximise my benefits while minimising opportunity costs when making this choice. A sensible choice might be a high-fibre cereal, as it possesses a satisfactory taste, it will keep me going until lunch and it has a low opportunity cost as I can make it consumption-ready faster than alternatives such as toast or eggs (and after all, time is the ultimate resource). However, the other morning I chose to consume five sandwich cookies, individually comprised of two chocolate disks with a sweet cream filling in between. Yes, I ate Oreos for breakfast. Analysing this choice will form the basis of this article and the analysis will have more to do with economics than you may originally envisage.
The tragedy of the commons
The tragedy of the commons is an economic theory developed by American ecologist Garret Hardin in his 1968 paper of the same name. Simply put, it posits that in the absence of incentives to prevent an overuse of a common resource, individuals acting independently and rationally will deplete the common resource, thereby leaving everybody worse-off in the long-term.
This is exactly what occurred when I chose to consume the Oreos for breakfast. I acted independently and pursuant to my own self-interest and the common resource was rapidly depleted. To provide some background, I conjecture that my parents purchased the Oreos from the supermarket the previous night. In so doing they probably intended that the Oreos be distributed equally among the family and not consumed in a period less than 48 hours. Why then was I so greedy? Why didn’t I choose to defer consumption to a more appropriate time?
Essentially, I made a strategic decision based on perceived choices of other family members. My time-preference for consumption was in fact later at night as I find milk and cookies highly conducive to reading textbooks and producing notes. Unfortunately though, I would not be home from university until long after my brother and sister arrived home from their respective educational institutions. Recognising that they would undoubtedly be ravenous after a long day of ‘learning’, I perceived that they would deplete the Oreos before I could arrive home. Based on that logic, I chose to get in first and consumed the majority of the packet.
Surely people don’t act like that, do they?
I would forgive any reader for thinking me to be selfish or juvenile based on the Oreos anecdote I just provided. I may also be crossed off a number of potential housemate lists. However, before you condemn my actions I would put to you that I am not alone in exhibiting this sort of behaviour. In fact, people from politicians to businesspersons all across the world exhibit this same sort of behaviour. It is the reason we encounter problems such as habitat destruction, unsanitary public toilets, spam email, overfishing and more. How then do we prevent people from behaving in this way?
The Coase theorem and property rights
The Coase theorem was first developed by economist Ronald Coase in his famous article “The Problem of Social Cost”. This theorem posits that if property rights exist, and there are few parties involved, then a Pareto efficient outcome will be reached. Property rights will cause efficient outcomes through the process of bargaining and resources will therefore go to where they are most valued. A simplistic reading of Coase is to assert that property rights will solve these problems.
This Coasian thinking certainly applies to my Oreo anecdote. For example, I still have some green-tea Kit Kats, which I brought back from Japan in February whereas the Oreos always disappear rapidly. This is because I have property rights over these Kit Kats and they are housed in my bedroom rather than in a common area. I therefore have the ability to exclude others from them and consume them whenever I so chose.
Whilst this theorem applies neatly to my small household example, the extent of the theorem’s applicability to the real world is debatable. In many real-world problems there are many parties, significant transaction costs and informational asymmetries.
One fascinating experimental study by Daniel Kahneman, Jack L. Knetsch and Richard H. Thaler demonstrated that even where transaction costs were low and informational asymmetries did not exist, the Coase theorem did not hold up in reality. This was because of what is known in behavioural economics as the endowment effect, i.e. an economic phenomenon whereby people ascribe more value to things merely because they own them. The endowment effect always meant trading volumes in the experimental studies were lower than those predicted by the Coase theorem and there were larger discrepancies between bids and offers than expected.
Despite the limitations of the Coase theorem it has been important in the economic analysis of the regulation of externalities and in the analysis and resolution of legal disputes by jurists and scholars. Furthermore, some tragedy of the commons scenarios have been prevented by assigning property rights such as the potential overuse of airwaves that provide our mobile phone services. These airwaves have been made the subject of property rights and auctioned off by governments to the highest bidder. Such auctions raise billions of dollars. That said, it is unlikely that assigning property rights is a feasible or realistic solution to problems such as overfishing, as enforcement costs would be prohibitive. Perhaps other solutions will be required for larger externalities and global problems such as Pigovian taxes or transferable production quotas.
Image: ‘Biscotti Oreo, sfondo trasparente’ by Bruce The Deus, https://commons.wikimedia.org/wiki/File:Oreo_biscuits_(transparent_background).png. Licence at https://creativecommons.org/publicdomain/mark/1.0/.