Reflecting on a century of economic progress and environmental problems
As the first decade of the 21st century comes to a close, the problem of the commons is more important to our lives — and more central to economics — than a century ago when the first issue of the American Economic Review appeared, with an examination by Professor Katharine Coman of Wellesley College of “Some Unsettled Problems of Irrigation” (1911). Since that time, 100 years of remarkable economic progress have accompanied 100 years of increasingly challenging problems.
As the U.S. and other economies have grown, the carrying-capacity of the planet — in regard to natural resources and environmental quality — has become a greater concern, particularly for common-property and open-access resources. In an article that appears in the 100th anniversary issue of the American Economic Review (AER) – “The Problem of the Commons: Still Unsettled After 100 Years” — I focus on some important, unsettled problems of the commons.
Within the realm of natural resources, there are special challenges associated with renewable resources, which are frequently characterized by open-access. An important example is the degradation of open-access fisheries. Critical commons problems are also associated with environmental quality, including the ultimate commons problem of the 21st century — global climate change.
Small communities frequently provide modes of oversight and methods for policing their citizens, a topic about which Professor Elinor Ostrom of Indiana University has written extensively. But as the scale of society has grown, commons problems have spread across communities and even across nations. In some of these cases, no overarching authority can offer complete control, rendering commons problems more severe.
Although the type of water allocation problems of concern to Coman have frequently been addressed by common-property regimes of collective management, less easily governed problems of open-access are associated with growing concerns about air and water quality, hazardous waste, species extinction, maintenance of stratospheric ozone, and — most recently — the stability of the global climate in the face of the steady accumulation of greenhouse gases.
Whereas common property resources are held as private property by some group, open-access resources are non-excludable. My article in the AER focuses exclusively on the latter, and thereby reflects on some important, unsettled problems of the commons. It identifies both the contributions made by economic analysis and the challenges facing public policy.
The article begins with natural resources, highlighting the difference between most non-renewable natural resources, pure private goods that are both excludable and rival in consumption, and renewable natural resources, many of which are non-excludable.
Some of these are rival in consumption but characterized by open-access. An example is the degradation of ocean fisheries. An economic perspective on these resources helps identify the problems they present for management, and provides guidance for sensible solutions.
The article then turns to a major set of commons problems that were not addressed until the last three decades of the 20th century — environmental quality. Although frequently characterized as textbook examples of externalities, these problems can also be viewed as a particular category of commons problems: pure public goods, that are both non-excludable and non-rival in consumption.
A key contribution of economics has been the development of market-based approaches to environmental protection, including emission taxes and tradable rights. These have potential to address the ultimate commons problem of the 21st century, global climate change.
Themes that emerge
First, economic theory — by focusing on market failures linked with incomplete systems of property rights — has made major contributions to our understanding of commons problems and the development of prudent public policies.
Second, as our understanding of the commons has become more complex, the design of economic policy instruments has become more sophisticated, enabling policy makers to address problems that are characterized by uncertainty, spatial and temporal heterogeneity, and long duration.
Third, government policies that have not accounted for economic responses have been excessively costly, often ineffective, and sometimes counterproductive.
Fourth, commons problems have not diminished. While some have been addressed successfully, others have emerged that are more important and more difficult.
Fifth, environmental economics is well positioned to offer better understanding and better policies to address these ongoing challenges.
Although I hope you will read the full article — which is very accessible — I will summarize its conclusions here.
Problems of the commons are both more widespread and more important today than when Coman wrote about unsettled problems in the first issue of the American Economic Review 100 years ago. A century of economic growth and globalization have brought unparalleled improvements in societal well-being, but also unprecedented challenges to the carrying-capacity of the planet. What would have been in 1911 inconceivable increases in income and population have come about and have greatly heightened pressures on the commons, particularly where there has been open access to it.
The stocks of a variety of renewable natural resources — including water, forests, fisheries, and numerous other species of plant and animal — have been depleted below socially efficient levels, principally because of poorly-defined property-right regimes. Likewise, the same market failures of open-access — whether characterized as externalities, following A. C. Pigou (1920), or public goods, following Ronald Coase (1960) — have led to the degradation of air and water quality, inappropriate disposal of hazardous waste, depletion of stratospheric ozone, and the atmospheric accumulation of greenhouse gases linked with global climate change.
Over this same century, economics — as a discipline — has gradually come to focus more and more attention on these commons problems, first with regard to natural resources, and more recently with regard to environmental quality. Economic research within academia and think tanks has improved our understanding of the causes and consequences of excessive resource depletion and inefficient environmental degradation, and thereby has helped identify sensible policy solutions.
Conventional regulatory policies, which have not accounted for economic responses, have been excessively costly, ineffective, or even counterproductive. The problems behind what Garrett Hardin (1968) characterized as the “tragedy of the commons” might better be described as the “failure of commons regulation.” As our understanding of the commons has become more complex, the design of economic policy instruments has become more sophisticated.
Problems of the commons have not diminished, and the lag between understanding and action can be long. While some commons problems have been addressed successfully, others continue to emerge. Some — such as the threat of global climate change — are both more important and more difficult than problems of the past.
Fortunately, economics is well positioned to offer better understanding and better policies to address these ongoing challenges. As the first decade of the 21st century comes to a close, natural resource and environmental economics has emerged as a productive field of our discipline and one that shows even greater promise for the future.