Goods that markets struggle with

Economists sort goods by two questions. Can people be kept from using it? And does one person's use leave less for others? A sandwich is easy to fence off and gets used up, so markets handle it well. A public good, such as national defense or a weather forecast broadcast to everyone, is the opposite on both counts: hard to fence off and not used up. Between them sits the common pool resource, where use by one reduces what others get, but excluding users is hard. Ocean fisheries, groundwater, grazing land, forests and the atmosphere's capacity to absorb carbon all fit this description.

A related problem is the externality: a cost or benefit that falls on someone outside a deal. A factory that pours smoke over a town does not pay the townspeople for their coughs, so the price of its products is too low and it makes more smoke than anyone would choose. In 1920 the Cambridge economist Arthur Pigou proposed a remedy that still bears his name: tax a harmful activity by roughly the harm it does, so the price tells the truth.

Ronald Coase complicated the story twice. In 1960 he argued that when rights are clear and bargaining is cheap, the parties can often settle a dispute themselves. The trouble is that pollution usually affects thousands of people, which makes bargaining expensive. Then in 1974 he looked into the textbook example of a public good, the lighthouse, and found that many British lighthouses were private, paid by fees collected at ports. Clever arrangements can sometimes solve problems that theory says markets cannot.

The tragedy of the commons

In 1833 the English economist William Forster Lloyd described an open pasture where every herder may graze cattle. Garrett Hardin made the idea famous in a 1968 article in the journal Science. The logic is simple. When a herder adds one more animal, each user gets the full gain but shares the cost of the overgrazing with everyone else. So each herder keeps adding animals, and the pasture is ruined even though no one wanted that. Hardin saw two ways out: private property or government regulation. Either divide the pasture, or have a public authority set and enforce limits.

History offers grim examples. The cod off Newfoundland supported fishing communities for centuries. Modern trawlers, competing for a shared stock, caught so much that the fishery collapsed, and in 1992 Canada closed it, putting tens of thousands of people out of work.

Ostrom's discovery

The political economist Elinor Ostrom spent decades studying real commons, from Swiss alpine meadows to Japanese mountain forests to irrigation systems in Spain and the Philippines. She found that communities often craft lasting rules to manage commons themselves, without either private division or control from a distant government. In the Swiss village of Törbel, a rule dating from 1517 barred anyone from sending more cows to the summer pasture than they could feed through the winter.

Ostrom drew out design principles that successful commons tend to share. They include clear boundaries around who may use the resource, rules suited to local conditions, a say for users in changing the rules, monitors who answer to the users, graduated sanctions for those who break the rules, cheap ways to settle disputes, and the right to organize without interference from outside authorities. In 2009 she became the first woman awarded the Nobel Prize in economics, which she shared with Oliver Williamson.

Firms and the commons

Companies stand in complicated relationships with shared resources. Some draw down a commons for private gain, such as a fishing fleet or a factory that treats a river as a free drain. Others help build commons: much of the open source software that runs the internet is written by programmers paid by companies that benefit from sharing it. The commons also includes things no market prices well, such as a stable climate or the interests of people not yet born. From a humanist view, these are the clearest cases where people must act as citizens and neighbors, not only as buyers and sellers.

Worked example

In the early 1970s the inshore fishery at Alanya, on Turkey's southern coast, was heading for trouble. About a hundred local fishers worked the same waters with small boats and fixed nets. Boats crowded the best spots and quarrels broke out. Over about a decade of trial and error, the fishers built a system of their own. Each September they draw up a list of everyone licensed to fish there and a list of named fishing spots, spaced so that one net does not block the fish from reaching the next. The eligible fishers draw lots for the spots. Then, through the season, each fisher moves one spot along every day, eastward in the autumn and back westward in the spring as the fish migrate, so that everyone gets the same share of good and poor days.

Ostrom described Alanya in Governing the Commons, and it maps closely onto her principles. The boundaries are clear: only listed fishers take part. The rules fit local conditions. Users made the rules and can change them. Monitoring is almost free, because a fisher who finds someone else in the spot assigned to him that day notices at once, and most disputes are settled among the fishers themselves. Local officials accept the arrangement rather than replacing it. Neither a private owner nor a ministry divides the sea. The lesson is not that markets or governments are useless, but that a third option exists and often works.