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Global Commons and their Management Urs Luterbacher.

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1 Global Commons and their Management Urs Luterbacher

2 What are commons sometimes also called common pool resources? Commons are an ambiguous notion They can mean resources belonging to – No one and thus to whoever has access to them – To several owners. There may or may not be complex ownership and use rules The term takes its origins from land in medieval communities that was open to most people in them It also applies now to international spaces and resources: Oceans, the Atmosphere, Antarctica

3 The Antarctica Common

4 Why study commons? One can show that in the long run open access type commons lead to overuse unless some regulatory mechanism is used The tragedy of the commons! Many aspects They lead to un-sustainability: Ownership problem and market failure This is true for local as well as global commons How can this problem be tackled analytically? Does it take several forms? What does it lead to? What are the solutions? Are these different locally, regionally and globally? What are the instruments to be used? Global commons raise specific problems

5 Environment, economy, polity One often hears that the environment, the economy, the political system obey fundamentally different logics Is this correct? Intuition tells us after some thinking that this is not the case: There is no economy without ecology, no political system without an economic system Moreover, the economic system and the political system feedback on the environment: Early agricultural kingdoms of the Mid-East, system collapses, conflict about resources

6 Private goods, externalities, and public goods Clearly an analytical framework is needed to study the relationships between these 3 aspects and to put them under a common (no pun intended) roof For convenience sake we will use the framework used originally by economists but then taken over by political scientists and resource analysts: Different kinds of goods Private goods: While my preferences or well-being depends on what I purchase, it does not depend on what others purchase Public goods: When I purchase units of it I can not keep others from consume it as well or sometimes common consumption desirable (non excludability) Public goods lead then to externalities good or bad!!

7 Collective goods and institutions Collective (public) goods are then up to a point non exclusive and some of them are non-rival They can lead to peculiar behavior such as free riding and the exploitation of the strong by the weak Some collective goods are semi exclusive and called club goods, some are rival and called commons (negative externalities) Commons often are related to fugitive goods All public goods require institutional settings in the form of coalitions These modify incentives and behavior

8 The Tragedy of the Commons and its Solutions The tragedy notion is due to the work of Hardin (1968) It represents an open access field situation in which every participant has an incentive to put more and more animals for grazing The Hardin common represents individual gains but shared common losses as the field gets to be totally overgrazed Under the circumstances, the grass is a fugitive resource that everybody has an incentive to grab before the other!

9 The Tragedy: A rigorous analysis Hardins analysis is verbal and kind of loose He does not consider the costs associated with herding itself His strategic analysis is vague and has led to a lot of confusion in the literature His analysis of solutions to the problem he is investigating is limited and imprecise He only evokes property rights solutions Nevertheless, his general conclusions are correct if commons are associated with open access

10 Commons: A correct representation All commons or common pool resource management problems do not necessarily lead to overuse (cf. Ostrom)

11 Gordon Schaefer Model: Another way of saying the same Cost curve Modified cost curve

12 Strategic aspects Strategic aspects of the common will depend on what agents anticipate about each other Do they have means of retaliating for damage? Not in open access common Their behavior is conditioned by others and the importance of moving first

13 The Instruments and the Debate around them What is an instrument? It is a policy measure that is supposed to correct for the presence of negative externalities Corrections are in principle only needed if negative externalities are present or if market mechanisms do not work in particular circumstances

14 Instruments and efficiency Instruments are there to induce agents to maximize the scarcity rent This implies a control of the number of producers/users and a control of what they produce use if it leads to negative externalities Production is naturally efficient even in the physical sense if the Hotelling rule is followed: example energy inputs The externality is not energy per se but the negative externalities associated with its uses, e.g. greenhouse gas emissions

15 Market for externalities solution Instruments of solution Taxation

16 Pigouvian Tax Solution The Pigouvian tax taxes the externality away If the political system is benevolent and completely informed, good solution although with a long term dynamic problem Has distributional impacts Can be counterproductive if mixed with different property rights systems (Chichilnisky)

17 Property rights solutions Advantages stressed by Coase Externalities can be bargained away Not always possible because of information problems Property rights may emerge spontaneously (Demsetz) Problem: Monitoring and transaction costs

18 Market Solutions: The Lindahl Equilibrium Rights and share of rights can be established and traded via a competitive price The price p represents a rate of transformation from the private good into a public good A price equilibrium based upon these principles is called a Lindahl equilibrium

19 Lindahl equlibrium graphic: Problem: Incentive to cheat by misrepresenting preferences

20 Commons and Trade The question of the commons becomes particularly important within the environment trade issue Trade between regulated and unregulated regions can lead to environmental problems

21 Trade and Environment From a general point of view, trade and the environment should be neutral with respect to each other Problems come from the different political social and legal structures between countries These lead to either advantageous or problematic relationships between the two

22 Positive and negative effects Environmental conditions can be positively affected by trade liberalization Positive effects can result from the suppression of distortions which have all kinds of costs including environmental ones Other legislation than trade legislation might create distortions: environmental standards A market economy and this is due for trade as well can work optimally only if some structural conditions are similar such as property rights To make all this explicit lets look at trade theories

23 Property Rights, the Environment and Trade Changes in the Economic Theory of Trade Traditional Theory Based on the Notion of Comparative Advantage: Heckscher Olin 2 New Notions: Importance of Increasing Returns to Scale and Intra-Industry Trade (Helpman, Krugman, Ethier, etc.) Importance of availability of a factor and factor prices (Chichilnisky)

24 Characteristics of Trade Importance of increasing returns in External aspects Monopolistic competition Some property rights regimes lower the price of factor inputs Countries with ill-defined property rights extract too many natural resources They have thus an "artificial" comparative advantage in environmental goods

25 The Chichilnisky Perspective Chichilnisky (1994) has analyzed trade links between regions with different property rights Basic conclusions are drawn from her investigation: The region with undefined property rights will supply more of a resource at any price This applies to any good that is "fugitive": rights of ownership established only when captured or freely extractable

26 Open access and private supply

27 Chichilnisky Perspective Apparent "abundance" of resources when no or ill-defined property rights Region "appears" to have a comparative advantage in the given resource. Abundance not due to any intrinsic natural availability of the resource but reflects absence of rights. Region without property rights gets poorer because it divests its resources at too low a price.

28 Chichilnisky: Analysis Assumptions about regions without well defined property rights: Elasticity of substitution between leisure and consumption for harvesters or extractors of the resource good is lower than 1 Extractors consume mostly other goods than the natural resource that are purchased with their harvest or catch An increase of the relative price of other goods with respect to the resource will result in more extraction

29 Consequences Regions with ill-defined property rights are "exploited" by those with well defined rights. Resultant lower prices lead to increasingly unfavorable terms of trade followed by more extraction of the resource Thus regions with poorly defined property rights grow poorer as a result of trade with regions with better defined property rights More important, corrective taxes are counterproductive: lower demand and lower prices lead to more extraction

30 Analysis of Countries with Ill-Defined Property Rights These countries are sensitive to price fluctuations due to substitution effects or taxation policies Lower prices lead to more extraction of natural resources due to a lowering of the opportunity cost of labor This lowers their bargaining power at the international level Their bargaining power is lowered further by the cost of the artificial "comparative advantage" in terms of natural resources on the society as a whole which might lead to social upheavals.

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