Managing the Global Commons

1. Managing the Global Commons Urs Luterbacher Graduate institute of International and Development Studies

2. What are commons? • 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 • 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. Illustration the triadic coalition model • This is revealed in Caplow’s coalition game in the triad: A, B, C but A>B>C, with A<B+C • Table of gains • The weak free rides on the strong • Notice: the additivity assumption

9. 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!

10. The Tragedy: A rigorous analysis • Hardin’s 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

11. Commons: A correct representation

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. Game theoretical representations:Pris. Dilemma Chicken

14. Instruments of solution Taxation Market for externalities solution

15. 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

16. Market Solutions: The Lindahl Equilibrium • Rights and share of rights can be established and traded via a competitive price along the following lines • Where p represents the rate of transformation from the private good into a public good

17. Lindahl equlibrium graphic: • Problem: • Incentive to cheat by misrepresenting preferences

18. Theory of slowly renewable resources • Slowly renewable resources have to be evaluated as an evolving stock such as a population minus withdrawals Evolution of z = Natural Dynamics of z minus catches

19. Population Dynamics • The simplest way to describe a population dynamic is to state that population growth is proportional to its size which leads to the following differential equation:

20. Solution • This differential equation can easily be solved: • Another formulation is the logistic growth equation

21. Exponential and logistic growth • Up to .5 we have (slow initial) exponential growth, then growth slows down and 1 is a limit

22. Example: world population growth • World historical population growth •  1750   1800  1850   1900   1950   1999   2008 • 791 978 1,262 1,650 2,521 5,978 6,707

23. Implication for dynamics

24. Slowly renewable resources: Production • Producers will be drawn into using the stock by profits: Evolution of inputs x, if average profits are positive, if F is production, q unit price, p unit costs

25. Equilibrium conditions • In equilibrium there should be an optimal level of the resource z if: Is maximized subject to the relation (1) before and where r is a discount rate: The discounted sum of all future profits is maximized with a discount rate r, the spot price of the resource is thus dependent on availability of z in nature and the discount rate

26. Optimal policies • To keep a renewable resource from getting exhausted 2 conditions have to be met: • A spot fee corresponding to the spot price has to be charged to correspond to the scarcity rent: • A license fee per producer unit: These 2 conditions are naturally fulfilled with property rights

27. Exhaustible Resources • No resource is truly renewable like no resource is truly exhaustible • The whole question is a question of timing • Resources that renew themselves very slowly (hundreds or thousands of years) are considered exhaustible • Engineers and economists were very concerned with this question in the beginning of the last century • This led to the question: How to deal optimally with such resources?

28. How to conceptualize exhaustible resources? • The answer was given in the late 1920s and early 1930s by Harold Hotelling: the Hotelling principle • An exhaustible resource is an asset and its net price (market price - extraction costs) should increase exponentially with the interest (or discount rate, to some extent a socio-political construct), i.e.: P(t) = P(0)ert or (dP/dt)/P = r

29. Optimal depletion • If for the resource Z, the price is P. Total value of resource: PZ. • Compare to other assets, P has to grow as P(0)ert to stay competitive • Competitive resource owners will deplete at a socially optimal rate • Take ρ the rate of return to the owner of natural resources. In equilibrium : ρ = r • Whenever, ρ ≠ r, we have a conservationists dilemma.

30. Conditions for the optimal working of Hotelling principle • 1. No externalities • 2. No uncertainty about future sales, exploration prospects, etc. • 3. No extraction with environmental externalities (ex. Gold Rush). • 4. Not too big differences between private and market (social) discount rate (for instance due to dangers of transfer within society)

31. Example: Deforestation processes • According to Hotelling principles a forested area is a particular type of asset whose capitalized value should grow with the interest rate. If this growth is not achieved other assets including agricultural ones will be closer and the forested land will either sold for development or transformed into another agricultural asset. • In particular: If the income flow stemming from the forest is lower than the income flow from other activities then deforestation will occur!

32. This can be due to: • subsidies for agricultural production • income subsidies or welfare • cost of property rights enforcement • prohibition of trade • unclearly defined property rights

33. Graphical analysis

34. Other incentive models: The Owen land use model • The land use model developed by Owen assumes only two types of land use, agriculture and dwelling and examines the special case of areas around urban centers • Whether land will be transformed into dwelling will depend on income streams generated by both • Arrival of newcomers increases income streams from dwellings especially if migrants get subsidies

35. Conclusions of Owen model and further development • Even under normal conditions, as long as there is an attraction to moving into an urban area such as a subsidy or the hope of a job, farm land will be urbanized down to a critical value which can be very close to zero. • Higher interest rate for agricultural investments as opposed to investments for urban dwellings will accelerate the process.

36. Further conclusions • Mass migration which can result from climate change will accelerate this process. • Foreign aid and relief can accelerate the process • An Ill-defined property right regime will initially slow but then accelerate the process. • Climate change might reduce net profits made from agricultural production and accelerate the process.

37. Estimating costs and the scarcity rent • As revealed by the Stern review (2006), discount rates constitute an important parameter in estimating climate change costs and the issue of acting now vs acting later • Low discount rates will increase the cost estimates of climate change almost irrespectively of the seriousness of climate change (cf. formula)

38. The discount rate • The consumption discount rate, δ, can be expressed by the following simple formula: • δ = ρ + gη • where ρ is the social rate of time preference, g isthe projected growth rate of average consumption , and η is the elasticity of the social weight attributed to a change in consumption • a value of 2 or 3 seems reasonable for η(Kenneth Arrow)

39. Ethics and costs • The discount rate debate is an ethical one: How to value the present generation vs future ones: the closer to 0 the more future generations are valued • There is also a trade off in the present vs future: better things across space instead of time measured by another parameter which (Dasgupta) is ηandwhich is taken as 1 by the Stern review • According to Dasgupta η should be greater than 1 (attention paid to inequality)

40. To understand the issue: the Krugman toy model

41. The Cooperation Problem • Cooperation in a decentralized system presents difficulties • Some forms of cooperation are more difficult to achieve than others • This is the case for environmental cooperation • Illustration with extended PD and Chicken

42. The Cooperation problem in Perspective Chicken Prisoner’s Dilemma Row Row C C C C (3,3) Column Column C C C C C C (4,2)Nash Equilibrium (Subgame Perfect) (2,2)Nash Equilibrium Row (4,1) (1,1) (3,3) NashEquilibrium (2,2) (1,4)

43. Cooperation is a different problem for trade and the environment • Trade: Multiplayer PD with retaliation possibilities • Environment: No credible retaliation • Strategic problem, finding ways to exclude cheaters or to induce non participants to come in: Greif paper • Almost “natural” in trade • Much more difficult in environment: shunning or invention of exclusionary mechanisms

44. The Problem at the Level of International Environmental Agreements • General monitoring of activities • Montreal: Exclusion via trade prohibitions • Kyoto: • Exclusion via prohibition of advantages: CDM • Compliance mechanism against cheaters • The cooperation problem is further complicated by domestic issues • Trade: Trade losers • Environment: Environmental losers

45. Cooperation at the regional level • Cooperation at the regional level can often take the form of common endeavors leading to common property • There are clear advantages to common property: risk sharing. The example of pools of water under properties defined at the surface is relevant. For each individual owner of the surface properties, digging a well might not be worth it because of the risks associated with the prospect of not finding any water under a particular property • Risk sharing in a common property arrangement tremendously increases the possibility of deriving benefits from digging wells in a coordinated fashion. In fact, the greater the number of participants in the risk sharing operation, the lower the costs associated with the enterprise and thus the higher the benefits for each individual owner: Insurance • Even risk- averse individual owners have an incentive to enter such an insurance scheme, which renders the costs of risk bearing negative

46. However preexisting property arrangements might make this difficult

47. Example : Water Asymmetries • Standard solutions often don’t work • They can add to the problem if for instance property rights have initially been distributed in a way that leads to inefficiencies • They will then often lead to conflict and credibility problems

48. Credibility Issues: Perfect and imperfect Information • Paradoxically in a sequential bargaining process the lack of knowledge of the opponent’s real intentions can lead to prudence and keep the other side prudent as well (risk averse) • It can thus lead to the emergence of equilibria which can lead to cooperative outcomes • It is best if such outcomes are backed by international institutional settings

50. Extrapolating from Regional to Global • The problem with global cooperation about the environment is often that exclusionary mechanisms are not present or are incomplete so that they are difficult to either punish cheaters or attracted non participants • What regional cooperation suggests is that on has to make cooperation more attractive than non cooperation by creating new benefits or avoiding predictable costs  common gains from a joint management of resources or avoidance of conflict costs (eg Antarctica)