Property, Economics Of

The Economic Foundation

A system of property rights finds its most common justification as a remedy to the tragedy of the commons. Imagine three communities living on the shore of a lake in a rather primitive state of development. Fishing is the only economic activity, and the fish in the lake currently reproduce enough to feed all three communities. From an economic perspective, equilibrium exists because the three communities live on the income from the capital rather than consuming the capital itself.

Suppose now that a more efficient fishing technique has been invented that allows people to catch more fish in less time. The communities may be aware that increased fishing will cause an adverse impact on the fishing environment through overfishing. If one community restrains itself to maintain the equilibrium, it will not capture most of the benefit of this innovation as the others take advantage. One community may have a strong incentive to fish extensively because it will keep all the gains of the fish it captures for itself, although the cost of the excessive use of the resource are split among all three communities. It makes little sense for one community to worry about the long-term effects of overfishing, without being sure that the others will act in the same way. Given this state of affairs, it will not be surprising to see people spend more time fishing than in finding a way to preserve fish for the future. Unless the communities reach some sort of binding agreement, the outcome will be a tragic rush to overconsumption that ends up in complete fish depletion.

The tragedy of the commons represents a distortion due to overuse because of the absence of restrictions on overconsumption of scarce resources. Economists, lawyers, and political scientists agree that the way to avoid this tragedy is to develop techniques that, rather than allowing free exploitation of scarce resources, are able to determine a price that corresponds to the social cost. One of these techniques, although not the only one, is a system of property rights.

...