Prof. Gaudin – Environmental Economics – Technical notes CPR p. 1
Externalities and market failure: The Case of Common Property/Open Access Resources
Note, this is just a primer, we will do more in class!
Common property/Open access resources such as groundwater aquifers, lakes, oceans, some grazing
land, etc. are accessible to anyone and belong to no one in particular. However, they can be
exploited. The harvest becomes the property of the harvester and can be sold on the market for a
positive price. Negative externalities occur in the case of common property resources because
individuals harvesting the common property resource do not take into account the impact of their
level of activity on the resource and on other harvesters’ costs.
Static (instantaneous) externality: each individual harvesting the resource imposes a cost on all other
harvester by depleting the resource. As the resource becomes scarcer, the cost of harvesting
increases for all. But this cost is not taken into account since it depends on the total amount
harvested, which is not under the individual harvester’s control.
Dynamic (inter-temporal) externality: in open access renewable resources, such as fish. The
amount of fish next year depends on the amount of fish left over this year to reproduce. Small
individual harvesters do not take into account this cost since it depends on the total sum of the
harvests and not on their individual harvest.
These externalities can be analyzed as in B with a MPC (calculated by adding up all the private MC
of harvesting) understating the MSC. The Marginal Benefit curve in that case is often assumed
constant as the harvest from a particular common property resource may be assumed to have no
impact on the market price for the harvested good (Graph A below).
The common property externality is sometimes analyzed at the level of the harvester (say a
fisherman for ex.) working for his own consumption, in which case the market price of the fish is
irrelevant. The marginal benefit (MB) to the fisherman decreases as the number of fish caught
increases (diminishing marginal utility). Assume for simplicity that the marginal cost is constant.
Instead of the MPC being understated for each fisherman, we may consider that it is the marginal
benefit perceived by the fisherman that overstates the marginal benefit to society. The social
marginal benefit (MSB) generated by the amount of fish caught is less than the marginal benefit
perceived by the fisherman because of the negative externality he imposes on other fishermen and
the value of the resource. (Graph B).
Graph A Graph B
This explains why common property resources tend to be overexploited and depleting too fast.
MPB=M
S
B
P
Qs Qp
P
p
MPC
MSC
M
S
B
P
Qs Qp
MPC=MSC
MPB
