Governing the Commons

Elinor Ostrom's work is relevant to most of our decisions

There are a lot of energy policy issues in flux right now: interconnecting low-carbon resources while balancing their effects on reliability and affordability, planning for system resource adequacy and where and how to do the planning, and the deleterious effects of external policies on markets, to name a few. Discussions of these issues would all benefit from more thoughtful consideration of economic foundations, which is why I have been writing about the economic theory underlying “market failure” and the role of markets as knowledge systems for decentralized coordination. Once I lay some more foundations I’m going to start collecting my thoughts here and applying them to the energy policy issues that I think are most important, but the economic foundations I write about are relevant far beyond applications to energy policy.

I used to teach environmental economics a lot, and one of my favorite parts of the material was tracing the theoretical progression from Pigou through Coase to Ostrom. In my “Anatomy of Market Failure” posts I did the Pigou-Coase part; let's add Ostrom to the mix now, because she brings insights that are essential to a fuller understanding of environmental issues, why and how they arise, and what we can and should do about them.

Anatomy of Market Failure I: Pigou and Polluter Pays

Anatomy of Market Failure III: Coase, Transaction Costs, and Missing Markets

This topic highlights something essential in economics that is often taken as given or assumed away: property rights. The idea of having property in an item, and that right being protected through informal and formal social institutions, is fundamental to exchange. Exchange and markets cannot thrive without the concept of property, which means that people cannot thrive without it. Having property in something means the freedom to choose how to make use of it – use it yourself, save it for later, loan it to someone, rent it to someone, let it sit idle, share it with someone, sell it. If it’s your property, you choose which of these actions to take by weighing the tradeoffs, the anticipated costs and benefits arising from your choice. Since David Hume wrote about property in 1738, we’ve generally perceived property as a social convention to foster peaceful, harmonious social coordination.

Neoclassical economics, being institutionally sterile, assumes that property rights are clearly and fully defined and are costless to enforce. That assumption is clearly too strong to be useful in understanding how we arrange exchange and social cooperation, and scholars since Coase have been relaxing that assumption, incorporating property rights enforcement and monitoring costs into their models, and creating better understanding of institutions that we use to better achieve social cooperation when those costs exist. In passing I’ll give a big shout out to Harold Demsetz’s 1964 Journal of Law & Economics paper, The Exchange and Enforcement of Property Rights, as an early and easy to read paper that lays some useful groundwork here. It's not the property rights paper for which he is best known (Demsetz, H. “Toward a Theory of Property Rights,” American Economic Review. Vol. 57. 2.: 347-359. (1967)), but it’s quite useful.

Property rights are almost never perfectly defined, in part because of the cost of defining and enforcing them, and in part because sometimes for the item in question it's not physically feasible. In teaching environmental economics I like to construct a continuum of property rights definition, where things we think of as “our” property are easy to define and enforce, such as contact lenses, or underwear. One person uses them and is unlikely to share, loan, or sell them. Toward the opposite end of the spectrum is open access (more on that below), a resource that anyone may access and can treat as property. But once you get beyond those extremes, you quickly get into murky property rights territory. A family's cookie jar does not belong to one person, but the members often follow a rule, often defined and enforced by one family member (a parent) about how many cookies they can eat and when. I can loan a sweater to a friend. A home is somewhere that people share, including by inviting people over temporarily, while someone (a homeowner, a landlord) “owns” the underlying physical property. Private parks and clubs may limit membership as a way to sustain the benefits of the resource. Networks, including road and highway systems, the internet, and electric grids, have ill-defined property rights both by physical nature and through governance choices (more on that shortly). Air, water, climate, all have strong physical limitations on the feasibility of defining and enforcing property rights. The world we inhabit is a world of ill-defined property rights, and as humans living in society we devise institutions (some that emerge, some that we design) to help us deal with that fact. This is where Ostrom comes in.

Ostrom’s work shone a bright, analytical light on the diverse ways that we as social beings manage our shared use of common-pool resources (CPRs). A CPR is a resource over which defining and enforcing property rights is costly or not feasible, so the resource is used in a shared way as a commons. The canonical example of a CPR, from Garret Hardin’s classic work, Tragedy of the Commons (Science, 1968), is a shared grazing pasture in an English medieval village. The agricultural productivity benefits of shared large-field farming practices meant that consolidating and fencing individual plots to graze personal cattle was not worth it; instead the custom evolved into using large fallow fields as shared grazing commons. The challenge, or tragedy (as Hardin named it) of the commons is that each villager has an incentive to add another head of cattle to the field. Once the number of cattle reach the field’s carrying capacity, each additional head of cattle reduces the grass available to all, but each person only bears a small portion of that cost while being able to have an additional head of (underfed) cattle. The ubiquity of this incentive leads to all villagers adding cattle to the field beyond its capacity, resulting in overgrazing, erosion, pest infestations, reduction in soil quality, and eventually in starving cattle and sterile land. This situation is also known as a collective-action problem because each individual’s incentive to act is not aligned with the actions that would create the greatest aggregate benefit. The lack of alignment is a direct consequence of the costliness or inability to define and enforce property rights.

Map of Laxton, UK. Source: Daily Mail UK

Elinor Ostrom’s pioneering, Nobel-winning research into CPRs shed light on the continuing practice of CPR governance. Her seminal work, and a good place to start, is Governing the Commons (1990). Unlike Hardin’s gloomy tragedy, Ostrom found successful commons governance through extensive field research, studying CPR governance practices in Cambodian rice farming villages, fishing villages around the world, and other situations in which people shared use of a resource that could be depleted or destroyed if not used sustainably. She and her colleagues found repeatedly that when the users of a CPR developed a governance framework, either by custom or by deliberate design (or a hybrid of the two), they could avoid the tragedy of the commons.

Such governance frameworks rely on the recognition that property rights in the resource are ill-defined, and that defining them is either costly or not feasible, so CPR users instead have “use rights”, a right to use the CPR in a defined way, that can overcome collective-action problems. These use rights can emerge from custom (such as the emergence of prior appropriation use rights in irrigation networks in the American West), from deliberate rules, or, most often, from a hybrid where rules formalize customary practices. Hayek famously (in Law, Legislation, and Liberty) characterized the English Common Law as such an evolved legal institution.

Ostrom’s work also delved into how governance frameworks should be structured differently depending on the nature of the CPR issue, and what the characteristics of communities were that made them more or less likely to be able to use community self-governance to achieve sustainable CPR use; here her book Understanding Institutional Diversity is outstanding. A final aspect of CPR governance relevant to policy is insight from both Elinor Ostrom and her husband, political scientist Vincent Ostrom, on the value of polycentric governance. Polycentricity means that multiple different authorities coexist simultaneously within a layered rules framework. Authorities also need not be part of the state, but can be other organizations in which CPR participants have vested authority. This layered approach to governance means that institutions and outcomes can emerge through evolution and adaptation as circumstances change and as people learn from experience in the existing institutions. For complex CPR problems, polycentric governance at different layers and taking different approaches (e.g., more or less formalized, more or less self-governance) may yield more beneficial outcomes than either a monolithic top-down regulatory approach or bottom-up community self-governance.

Ostrom’s governance framework rests on the fundamental concept of property rights, but modifies the concept to the CPR context in which property rights definition and enforcement are either too costly or not feasible. In this context, governance entails specifying the scope and boundaries of the CPR, defining the permitted participants/users, and defining the use rights that the users have in the CPR. For example, in a shared community irrigation system, the water is scarce and its availability varies over time. A CPR governance institution would specify the boundaries of the irrigation system and the community members who have rights to withdraw from it. It would also define as a use right how much water each member can withdraw.

Examples of environmental CPR issues include management of resources like fisheries and forests, air pollution, water pollution, urban noise pollution, irrigation systems, and climate. Global climate is a CPR in the sense that property rights in the climate are necessarily ill-defined or not feasible, with a resulting collective-action problem that individually beneficial actions can lead to systemic adverse outcomes. Ostrom’s climate-focused work argued for developing polycentric efforts to reduce the risks associated with greenhouse gas emissions, rather than sole emphasis on global climate policies (for example, Nested externalities and polycentric institutions: Must we wait for global solutions to climate change before taking actions at other scales? Economic Theory 49, no. 2 (2012): 353-369). National, province-level, state-level, and local formal rules and informal norms can coexist and create different pathways for greenhouse gas reduction. Applying this logic to carbon policy treats the right to emit greenhouse gases as a use right.

Ostrom’s pathbreaking work used multiple methods and examined widely diverse contexts in which humans face collective action problems, and come up with various ways other than top-down state force to address those problems. Our physical and social systems are layered, complex systems of systems, and we deal with the unavoidable collective action problems that arise through hybrid governance institutions that blend emergent, evolutionary institutions with designed ones. One thing we don't do well is institutional change to adapt our governance institutions to changing economic and technological conditions, but perhaps understanding Ostrom's framework better gives us some insights in to how to make governance less top-down, less rigid, and more adaptable to inevitable change.