Solving the 'Tragedy of the Commons': An Alternative to Privatization

Abstract

"This paper formulates the 'tragedy of the commons' in game-theoretic terms. The source of this problem is that of moral hazard, wherein the unobservable behaviour of agents who have an incentive to violate a trust induces their anti-social action. Since the outcome of the collective behaviour of all agents is observable, it is possible to devise a rule which penalizes each agent by a sum exceeding the gain which any agent would relize by his or her independent anti-social action. It is shown that an appropriate rule involving collective punishment will provide an incentive structure which induces each rational agent to behave in a socially responsible manner, so that in equilibrium, such penalties will not have to be exercised."