The commons and sustainable development

Principles of Sustainable Development Fourth Topic The commons and sustainable development Simone D Alessandro Department of Economics & Management University of Pisa simone.dalessandro@unipi.it May 3 & 8, 2017

Instructions (I) This is a simple card game. Each of you will be given four cards, two of these cards are red (hearts or diamonds), and two of these cards are black (clubs or spades). All of your cards will be the same number. The exercise will consist of a number of rounds. When a round begins, I will come to each of you in order, and you will play two of your four cards by placing these two cards face down on top of the stack in my hand.

Instructions (II) Your earnings in dollars are determined by what you do with your red cards. In each of the first five rounds, for each red card that you keep you will earn four dollars for the round, and for each black card that you keep you will earn nothing. Red cards that are placed on the stack affect everyone s earnings in the following manner. I will count up the total number of red cards in the stack, and everyone will earn this number of dollars. Black cards placed on the stack have no effect on the count. When the cards are counted, I will not reveal who made which decisions.

Instructions (III) I will return your own cards to you at the end of the round by coming to each of you in reverse order and giving you the top two cards, face down, off the stack in my hand. To summarize, your earnings for the round will be calculated: earnings = $4 times the # of red cards you kept +$1 times the total # of red cards I collect. Use the paper to record your decisions, your earnings, and your cumulative earnings. You would not obtain money, but a small bonus in marks for the final exam proportional to your total earnings.

Instructions: Treatment You have 5 minutes to talk together, then we can back to the experiment. Other five rounds, with earning of the second stage earnings = $2 times the # of red cards you kept +$1 times the total # of red cards I collect. Use the paper to record your decisions, your earnings, and your cumulative earnings.

The Public Good Game n players simultaneously choose their contribution g i (0 g i y) where y is the players endowment. Each player iearns π i = y g i + mg, where G = n i=0 g i and 1 < m < n. Real-life example = taxes, cooperative production, managing of common resources, limiting carbon footprint Predictions with self-regarding players = Each player contributes nothing, i.e. g i = 0. Experimental regularities = players contribute 50% of y in the one-shot game. Contributions unravel over time. Communication and individual punishment increase contributions. Interpretation of the experimental results = reciprocate expected cooperation; when some fail to contribute reciprocate by contributing less.

Cardenas, Stranlund, and Willis (2000): Common Pool Resource game Villagers choose how many months would spend extracting resources from the hypothetical forest (the common pool resource). There was a level of exploitation (one month per year) that, if practiced by all, would maximize the total payoffs to the group. Each individual would do better by extracting much more than this social optimum. Analogy between the experimental game and villagers everyday challenges of making a livelihood from the real forest. This setup is similar to the Public Goods game, except that overextracting resources is a public bad.

Cardenas et al. (2000): First Stage In the first stage of the experiment, lasting eight periods, there were no incentives and no communication among the villagers. The villagers, on average, extracted 44 percent less of the experimental resource than the amount that would have maximized their individual payoffs. The measure of individual s social preferences is the difference between how much a villager extracted from the forest and the amount of extraction that would have gained her the greatest material payoff given what everyone else did. Evidence that social preferences were quite common among the villagers. How incentives affect social preferences?

Cardenas et al. (2000): Second Stage In the second stage of game, with nine periods of play, Cardenas introduced two new treatments. In nine of the groups, the villagers were allowed to communicate with each other briefly before playing anonymously. These groups extracted a bit less under the communication treatment than they had in the nocommunication stage. (Apparently, communication among the villagers somewhat enhanced the behavioral salience of their social preferences.) In five groups, they would have to pay a small fine if it was found that they had extracted more of the resource than the social optimum. They would be monitored (which would occur with a probability known to the villagers). Villagers in these groups initially extracted much less than those without the fine, showing that the penalty had the intended effect. But as the experiment progressed, they raised their extraction levels. (Collateral cultural damage)

Cardenas et al. (2000): Communication vs. economic incentives

In search for a definition Ref: Silke Helfrich Common Goods Don t Simply Exist They Are Created (2012) Economics tends to classify goods in four groups: private and public goods, club goods and common goods. Difficulty in applying this classification in order to organize real-world objects. Drinking water, for example, is usually considered a common good. According to the neoclassical theory, common goods are defined among other things by the fact that we compete for their use. If I drink a glass of water, nobody else can enjoy the same water a second time. Economists call this characteristic rivalry. The question is rather about differing degrees of competition for consumption. Use by one person limits the opportunities of other people to use the good, but not in terms of all or nothing, but rather more or less.

Subtractability Elinor Ostrom termed this feature: subtractability. It illustrates the gradual nature of the phenomenon. Other individuals opportunities for use are not necessarily lost due to one s own use, but something is subtracted from them. The situation is different when it comes to knowledge or information. Both of them increase as we use them simultaneously and frequently. Economists call this characteristic non-rivalry. The difference between rival and non-rival resources is a qualitative one.

From classification to rights In the classification of goods mentioned above, common goods are considered rival. According to the theory, common goods are characterized by being non-excludable. For instance, we all indeed have the right to access sufficient quantities of clean drinking water. From a normative viewpoint, it is therefore difficult to exclude people from using drinking water. But technically speaking, it is fairly easy to exclude them. All it takes is refraining from investing in water supply, and sealing or privatizing springs or wells, and then bottling the water in containers and selling it at a certain price. In fact, roughly three billion people do not have access to clean drinking water!

Classification of Goods

Innovations and excludability The nonexcludability feature does not remain unchanged over time. What is technically impossible today may be possible tomorrow, thanks to an invention. What is too expensive today may seem profitable tomorrow. Technical or institutional innovations can make the establishment of usage rights cheaper. Normative convictions and values can change. If the structure of property rights is variable, there would seem to be few goods the services of which are non-excludable, solely due to some physical attributes. In other words a common good does not have the characteristic of non-excludability; rather, it is given this characteristic.

Tragedy of the commons Picture a pasture that is open to all. Each herdsman will try to keep as many cattle as possible on the commons... the inherent logic of the commons remorselessly generates tragedy. Garrett Hardin, The Tragedy of the Commons (1968) A key characteristic of local commons is that there are typically several participants (but a relatively small several.) Hardin applied the commons metaphor to global commons problems such as large-scale air and water pollution and overpopulation (open-pool resources). Ostrom has concentrated her attention on local commons.

Appropriation games or public bad games Instinctive economists approach: Model commons problem as an appropriation game. Common resource shared by N players, intensity of use by i is x i. number of cows pastured, amount of water extracted, etc Payoff to player i is Π(x i, i x j). Given actions of others, Π(x i, i x j) is increasing in x i over some range and then decreasing. Π(x i, i x j) is a decreasing function of i x j

Nash Equilibrium Under plausible assumptions, this game will have a unique Nash equilibrium. In Nash equilibrium each user imposes a negative externality on all other users, but does not take this into account when choosing his intensity of use. This equilibrium will not be Pareto efficient. The resource will be overused.

GAME 1 Ostrom (1990) With two players, the game can be easily represented. Let L = 20 is the sustainable harvest of the common-pool resource. If the two players agree on harvesting L/2 = 10 the pasture would be used sustainable (strategy C). If both choose the defect strategy (D), they get zero profit. If one cooperate and the other defect, the defector gets 11 while the cooperator gets 1. C P 1 D P 2 C D 10 1 10 11 11 1 0 0

Traditional Economists remedies 1. Centrally enforced solutions (Leviathan): Pigovian solution : Price the externality: Find the optimal solution, charge an access fee equal to the total externality caused by an extra use. Legal limits on quantities extracted by each individual 2. Enclosure Privatize the commons by assigning property rights to exclusive use

Leviathan s difficulties Centrally imposed solutions require central knowledge of payoff functions and public observability of activities of each individual. They require a non-corrupt central authority. They require intelligent (sophisticated) political decision-making by central authority. Ostrom (1990) provides a clear rational for the Leviathan s failure.

GAME 2 Ostrom (1990) If the external authority can easily monitor the actions and determine the capacity, it can sanction noncompliance (players that do not harvest L/2). Given the previous payoff a sanction of 2 is sufficient to generate an optimally efficient equilibrium. C P 1 D P 2 C D 10 1 10 9 9 1 2 2

GAME 3 Ostrom (1990) The implications of incomplete information are relevant. Let us assume that the central authority has incomplete information of the herders strategy and punishes defections with probability y and fails with probability 1 y. Moreover it punishes cooperators with probability x.

GAME 4 Ostrom (1990) Suppose that x = 0.3 and y = 0.7, we get

Problems with privatization Requires enforcement of property rights and monitoring of action of users. Fencing the range land Patrolling the berry patches (cost of monitoring) How does one assign property rights to flowing water, swimming fish? Transferring property rights to a single owner introduces problems of equity.

Ostrom proposals Ostrom (1990) proposed that we learn from case studies of successful and unsuccessful real world common property institutions. She conducted field studies and studied the field studies of others. She found that enduring institutions achieved more efficient outcomes than Nash equilibrium for simple game, but were not the predicted first-best efficient outcomes. Moreover although one-shot model applies, many commons problems are not one-shot games, but repeated games, played year after year.

Repeated Games What does game theory predict for repeated games? Folk theorem: In a repeated game without a fixed end point, if players are well-informed about each others actions, almost any behavior can be sustained as a Nash equilibrium (by strategies that punish deviations.) Some of these equilibria will be efficient. Some will not be. Neither Nash equilibrium of one-shot game, nor Pareto optimal outcome is a reliable predictor of outcome.

GAME 5 Ostrom (1990) Cost-enforcement agreement

Building institutions Ostrom suggests a fruitful path. Outcomes are not well predicted by simple models that incorporate few facts. Study a large number of durable and less durable institutions. Look for regularities. Try to understand what happens and why. This requires detailed observation, guided by sophisticated theory.

Norms and human evolution Successful commons operations are enforced by norms. Norms are monitored by entire population. Humans seem to have an evolved ability to generate and follow norms. Experimental evidence.

Anti-commons Information economy has been described as an anti-commons. Instead of a game in which substitute goods are depleted, complement goods are added by individual contributors. Nash equilibrium has undersupply Privatizing ideas with patents does not help.

Effective Commons Governance Effective commons governance is easier to achieve when: the resources (and use of the resources by humans) can be monitored, and information can be verified and understood at relatively low cost; rate of changes in resources, technology and economic and social conditions are moderate; communities maintain frequent face-to-face communication and dense social networks (social capital and trust); outsiders can be excluded at relatively low cost from using the resource; users support effective monitoring and rule enforcement. These features are not typical of the global commons. The challenge is to devise institutional arrangements that help to establish such conditions.

The Global Commons It is not impossible. Ozone Depleting Substances (ODS)

General Principles

Worldviews, Institutions, and Technologies (WIT) Beddoe, Rachael, et al. "Overcoming systemic roadblocks to sustainability: The evolutionary redesign of worldviews, institutions, and technologies." PNAS 106.8 (2009): 2483-2489. A culture can be viewed as an interdependent set of WIT. Worldviews are our perceptions of how the world works and what is possible, encompassing the relationship between society and the rest of nature, as well as what is desirable. Institutions are a culture s norms and rules, and constrain individuals behavior and serve as problem-solving entities that allow societies to adapt to their environments. Technologies are the applied information that we use to create human artifacts, as well as the institutional instruments used to help us meet our goals. For any individual WIT, there are many variants that a society may adopt, and each variant has its costs and benefits relative to local conditions.

An evolutionary framework The frequencies of these behavioral variants change over time in response to different selection pressures. Selection pressures include changing resource availabilities, environmental conditions, shifts in behavior of other species or members of the population. Variants that more favorably interact with the socio-ecological context generally increase in their frequency within the population. WIT are mutually interdependent and mutually reinforcing. A set of worldviews will drive the institutions and technologies we develop. For example, if our goal is to improve quality of life, we will develop institutions and technologies that promote that goal; whereas if our goal is endless economic growth, we will develop a different set of institutions and technologies.

Adaptation and Maladaptation The desired outcome of selection on our WITs is to create a society that is adapted to its surroundings and situations and provides for the wellbeing of its populations. However, it is possible for formerly adaptive WITs to become maladaptive. The ecological context can change, either because of exogenous conditions or through the effects of our institutions and technologies. Cultures must re-adapt to changed surroundings in an ongoing coevolutionary process, resulting in new socio-ecological regimes. Maladaptation occurs when WITs become locked-in. The result of a society locked-in to a maladaptive WIT is, potentially, a societal decline like those observed in many historical settings.

The Easter Island Civilization

In search for an explanation (Diamond, 2005) Historical research demonstrates that crises leading to a society s decline do not result from a single, easily identifiable cause with easily identifiable solutions. Dramatic effects and societal decline occur only when socio-ecological systems have become brittle and unable to adapt due to other causes. Our focus will be on the institutional and cultural failure. For instance, in Easter Island, the inability of the society to change their culture contributed to its collapse.

Is our contemporary WIT maladaptive? There is a growing evidence in US, that economic growth seems to be associated to undesirable side-effects on well-being. The Easterlin paradox: people do not become happier when a country s income increases. The trends of the various indicators document: An increase in: loneliness, sense of isolation, instability of families, generational cleavages, mistrust A decrese in: social contacts, honesty, solidarity, social participation, civic engagement. Moreover: US work hours increased in the last decades. The Easterlin paradox becomes more paradoxical Why do Americans strive so much for money if money does not make them happier?

Easterlin paradox

Working hours Source: Rogerson (2008)

Is our contemporary WIT maladaptive? Market institutions are geared toward economic growth and provide only private goods at the expense of public goods. Many governments worldwide have long-standing policies that promote growth in market goods at the expense of non-market public goods generated by healthy ecosystems. These include: i. over $2 trillion in annual subsidies for market activities and externalities that degrade the environment (i.e., perverse subsidies); ii. reduced protection or privatization of the commons; and iii. inadequate regulations and inadequate enforcement of existing regulations against environmental externalities. Our institutions are designed to maximize energy and resource throughput and are poorly adapted to the needs of a full world.

Expand the Commons Sector Beddoes et al. (2009) suggest to invest in institutions and the technologies required to reduce the impact of the market economy and to preserve and protect public goods. To create another major category of institution, the commons sector, which would be responsible for managing existing common assets and for creating new ones. Some assets should be held in common because it is more just; these include resources created by nature or by society as a whole. Others should be held in common because it is more efficient; these include nonrival resources for which price rationing creates artificial shortages (information), or rival resources that generate nonrival benefits, such as ecosystem structure (forests). Others should be held in common because it is more sustainable; these include essential common pool resources and public goods.

A win-win adaptive strategy Market can substitute communities and state in the management of such resources since the problem of non-excludability is technologically solved. By contrast, the commons are not a peculiar feature of a resource, but a managing procedure communing which can be considered as a proper production process where communities generate institutions (rules and norms) and the technology able to manage and to re-enhance the benefits and the services provided by commons pool resources and Nature. Thus, people involved in such activities are co-producers of alternatives. Two remarks: i. The promotion of the commons increases social relations and contributes to enhancing well-being during the transition. ii. From an evolutionary perspective, different social settings may reduce the risk of the lack of alternative institutions.

References Required Readings: a) Elinor Ostrom (1990) Governing the Commons, Ch. 1 b) Helfrich, Silke. "Common Goods Don t Simply Exist-They Are Created." The Wealth of the Commons, D. Bollier and S. Helfriche Eds., The Commons Strateges Group (2012): 66. c) Rachael Beddoe et al. (2009) "Overcoming systemic roadblocks to sustainability: The evolutionary redesign of worldviews, institutions, and technologies", PNAS, vol. 106 n. 8, pp. 2483-2489 Suggested Readings: a) Thomas Dietz, Elinor Ostrom, Paul C. Stern (2003) "The Struggle to Govern the Commons", Science, vol. 302, pp. 1907-1912 b) Elinor Ostrom et al. (1999) "Revisiting the Commons: Local Lessons, Global Challenges", Science, vol. 284, pp. 278-282 c) Cardenas, Juan Camilo, John Stranlund, and Cleve Willis. "Local environmental control and institutional crowding-out." World Development 28.10 (2000): 1719-1733.