Everyone Wants It, Nobody Will Pay

Two properties, and almost everything in this chapter follows from them.

A good is non-rival if my consuming it does not reduce what is available to you. A radio broadcast is non-rival; a sandwich is not. A mathematical proof is non-rival in an absolute sense: every person who has ever used Pythagoras has used all of it.

A good is non-excludable if you cannot practically stop people who have not paid from benefiting. The standard example is a lighthouse: the beam does not check receipts.

A good with both properties is a public good, and the term is technical rather than political. It describes the structure of the thing, not who provides it. Plenty of public goods are privately supplied, and plenty of services provided by states (a hospital bed, a place at a school) are rival and excludable, and are therefore not public goods in this sense at all.

The problem with public goods is that markets under-supply them, and the reason is structural rather than a claim about human nature. Suppose a lighthouse costs a thousand pounds and is worth a hundred to each of fifty shipowners. Building it is clearly worth doing. But each owner reasons that the beam will shine regardless of whether they contribute, so the individually sensible move is to wait and let the others pay. Everyone reasons identically, and a thing that was worth five thousand pounds to build for one thousand does not get built.

Note what the free rider problem is not. It is not that people are greedy: an owner who genuinely wants the lighthouse and would gladly pay their share still has an incentive to wait, because contributing when others do not is simply losing money. The failure survives good intentions, which is why the usual remedy is compulsion (taxation is a mechanism for making everyone's contribution conditional on everyone else's) or some institution that achieves the same conditionality by other means.

Next to public goods sits a category that behaves worse: goods that are rival but hard to exclude people from. A fishery. An aquifer. A pasture. The atmosphere's capacity to absorb carbon. Here your consumption does reduce mine, and I still cannot keep you out.

Garrett Hardin's 1968 essay gave this its famous name. Imagine herders sharing a pasture: each gains the full value of an additional animal, while the cost of overgrazing is spread across everyone. The arithmetic favours adding animals right up to the point where the pasture collapses, and every individual decision was rational on the way down. As a description of unregulated fisheries, groundwater depletion and the atmosphere, the tragedy of the commons is uncomfortably good.

As a general claim about commons, it is wrong, and the demonstration is one of the better stories in the discipline.

Elinor Ostrom spent decades in the field looking at actual common-pool resources: Swiss alpine pastures managed collectively since the thirteenth century, Japanese village forests, Spanish irrigation communities operating for five hundred years, Philippine fisheries, Nepalese water systems. Many of these were neither privatised nor state-managed, and many had not collapsed. Some had been running, sustainably, for longer than most nation-states have existed.

She extracted design principles from the ones that worked. Clearly defined boundaries: who has the right to use this, and where does it end. Rules matched to local conditions rather than imported wholesale. Users participating in making the rules that bind them. Monitoring carried out by the users themselves or by people accountable to them. Sanctions that are graduated (a warning first, escalating with repetition) rather than a single catastrophic penalty nobody is willing to impose on a neighbour. Cheap, accessible conflict resolution. And recognition by higher authorities of the community's right to organise.

Hardin's error, she argued, was to describe an open-access resource with no rules and then draw a conclusion about commons in general. A commons with governance is a different thing, and governance takes more forms than the textbook's two.

Ostrom won the Nobel in 2009. The principles hold up because they attack the actual mechanisms: boundaries make monitoring possible at all, local rule-making uses the knowledge the users have and the state does not, and user monitoring is cheap because they are there anyway and have the most at stake.

One last case, because it shows a public good being created by legal fiat. An idea, once it exists, is perfectly non-rival: copying it costs almost nothing and using it deprives nobody. The efficient price for an existing idea is therefore zero, and at zero, nobody can recoup the cost of producing new ones. A patent resolves this by making the non-excludable artificially excludable for a period, deliberately sacrificing some efficiency in the use of existing ideas to buy an incentive to create more.

That is a genuine trade-off rather than a free lunch, and it is why the serious arguments about intellectual property are always about duration and scope rather than about whether it should exist. A patent that is too short or too narrow does not fund invention; one that is too long or too broad taxes everybody for an idea that was going to be had anyway.