Tag Archives: Elinor Ostrom

03.22.2013 | The Tragedy of the Commons: Improving Your Reputation

A small group of New Jersey winemakers has a problem. No one knows that they blend a gourmet product.

After all, say, “New Jersey” and no one thinks vineyard. Most New Jersey wine, with strong hints of blueberries, raspberries or cranberries is best on ice cream. How then to distinguish the good stuff from everyone else’s?

An economist would say that your plight resembles the tragedy of the commons. Wonderfully described by economics Nobel Prize laureate Elinor Ostrom, the tragedy of the commons prevails when people destroy a common resource by overusing it. In a pasture, pursuing their individual interest, farmers tend to overgraze their animals. In a workplace refrigerator, we create a mess. What’s good for one is catastrophic when everyone does it.

Ostrom explained, though, that people can transform the tragedy of the commons into a solvable problem of the commons. Realizing it is in their best interest to create “collective action,” farmers voluntarily implement rules that preserve the pasture.

Although usually, the tragedy of the commons is associated with abusing common resources like our air, our water and the refrigerator we share at work, NJ fine wine makers face a similar situation. Voluntarily, they too need to cooperate because their common reputation has been abused. Through “collective action” they can disassociate themselves from the NJ commons that is associated with low quality. And that is precisely what they have done. Rebranding their region, fine wine makers in NJ have established the Outer Coastal Plain Vineyard Association. If they can get consumers to associate O.C.P. with fine wine, then, they can enter the field in which Napa Valley and French wines dwell.

Sources and Resources: I first started thinking about NJ wines and the tragedy of the commons after reading a NY Times Magazine article from Planet Money’s Adam Davidson. It returned me to Elinor Ostrom and this great podcast interview after she won her Nobel. I especially recommend the podcast because Dr. Ostom recently died and she was a very interesting lady.

Posted by: adminEcon
Tags: collective action, Elinor Ostrom, monopolistic competition, tragedy of the commons
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06.20.2012 | The “Problem” of the Commons

Located 30 miles from Cape Cod, Massachusetts, the island of Nantucket has no traffic lights. Instead, drivers respond to stop signs, rotaries and courtesy. More often than not, if a walker or a biker needs to cross the street, cars stop. When someone is making a left turn or leaving a parking lot, cars wait.

Nantucket’s lack of traffic lights started me thinking about Nobel laureate Elinor Ostrom who researched how we abuse the free goods that we share. Called the tragedy of the commons, in a communal pasture, we overgraze our cows. In a workplace refrigerator, we create a mess. Dr. Ostrom believed though, that when people care about their common pasture or refrigerator, the tragedy of the commons becomes a solvable problem of the commons.

Telling about a communal pasture in Switzerland, Dr. Ostrom explained how farmers avoided overgrazing by creating voluntary rules. “What we have ignored,” she said after her Nobel Prize was announced, “is what citizens can do . . . as opposed to just having someone in Washington or at a far, far distance make a rule.”

Perhaps Dr. Ostrom would have seen another example of her work in Nantucket. There have been no meetings in Nantucket for everyone to discuss our commonly “owned” roads and yet abuse is rare. Is it because we have a fundamental drive to cooperate that sometimes overrides our short-term self-interest?

Elinor Ostrom died on June 12. As the first woman to receive the Nobel Prize in economics, a political scientist, and someone who paused during a radio interview to go to her backyard to observe a beautiful deer, she sounds fascinating. You might want to read more about her work and life here. And, in a classic 1968 article, Garrett Hardin describes the tragedy if the commons.

Posted by: adminEcon
Tags: Elinor Ostrom, Garrett Hardin, Nantucket, negative externality, pollution, problem of the commons, tragedy of the commons
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10.15.2010 | Nobel Cash

If you win a Nobel Prize, you get a cash prize of approximately $1.5 million. The size of that prize relates to how well the foundation that manages Alfred Nobel’s endowment has fared. According to the Financial Times, during the 1990s the payout increased each year. More recently, prize amounts have been frozen because of a plunge in the fund’s value.

When he created the endowment in 1895, Alfred Nobel specified that its assets should be invested in “safe securities”. The Times says that today, the fund is apportioned among global stocks, fixed income, and alternative investments that include hedge funds. The fund’s executive director said that in the future, additional attention would be given to “risk control”.

When economist Robert Lucas won his Nobel Prize in 1995, half was given to his ex-wife Rita. As stated in their 1988 settlement, “‘wife shall receive 50 percent of any Nobel Prize.’ The clause expired on October 31, 1995.” Albert Einstein’s Nobel money also had to go to an ex-wife because of their divorce settlement.

Talking about the cash prize, Elinor Ostrom, the first and only woman to become an economic Nobel laureate (and she is a political scientist) said that she donated it to fund research at the Indiana University Foundation.

Winners Robert Mundell and Gary Becker were concerned about exchange rates. Expecting the euro would appreciate against the dollar, Mundell first converted his kronor to euros. Gary Becker postponed collecting his prize as he sought to buy futures to protect its value against the dollar. Before he completed the transaction, a Swedish currency crisis diminished the value of the prize from $1.2 million to $900,000.

Chemistry winner Martin Chalfie, a Columbia professor, pointed out that an international prize used to be tax free. Now, though, as he expressed it, “50 percent of it immediately went to the city, the state, and the federal government. The rest of it is going to help put my daughter through college.”

The Economic Lesson

Just like the price of a dress, the “price” of foreign currency can fluctuate in response to demand and supply. Because the Nobel Prize money is paid in Swedish currency, exchange rates affect its size.

Posted by: adminEcon
Tags: Elinor Ostrom, foreign exchange, Gary Becker, Nobel Prize, Robert Lucas
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08.17.2010 | Utilities Included

In NYC, there are 250,000 housing units that use more electricity than most others. The reason? Buildings without meters for each apartment have leases that say “utilities included”. So, whether tenants use more or less power, the rent is the same. Consequently, they perceive that their electrical consumption is “free”.

What happens when we think something has little or no cost? We tend to use more of it.

Elinor Ostrom, winner of the Nobel Prize in economics wrote about how people abuse a good that appears free because it is owned by all of us. Called the tragedy of the commons, for a pasture, we overgraze our cows. For a workplace refrigerator, we create a mess. Factories tend to pollute more when there is no cost. Parking is tough to find when no one has to pay for a space. Dr. Ostrom believed though, that when people care about their common pasture or refrigerator or air, they can willingly formulate a solution together.

The Economic Lesson

With price as the y-axis and quantity as the x-axis, a demand curve is downward sloping. Lower prices make us willing and able to purchase more of an item. With a lower price, the item requires less sacrifice and we have more to spend elsewhere.

According to British economist Arthur Pigou (1877-1959), the tragedy of the commons can be solved with a fee or tax that makes an overused commodity more expensive. For those NYC overusers of electricity, individual meters that connect cost to usage would eliminate the extra expense to landlords and diminish the ease with which additional greenhouse gases can be created.

Posted by: adminEcon
Tags: Arthur Pigou, Elinor Ostrom, free goods, law of demand, tragedy of the commons
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12.07.2009 | More on the Tragedy of the Commons

Good discussion of the Tragedy of the Commons in three podcasts:
1. 2009 Nobel Laureate, Elinor Ostrom, discusses her ideas in the 10/23 Planet Money podcast. In a 15 minute interview, she uses her department’s messy refrigerator as one of her examples.
http://www.npr.org/blogs/money/2009/10/podcast_elinor_ostrom_checks_i.html

2. An 11/30 Econtalk discussion between Russ Roberts and Pete Boette further looks at Ostrom. One interesting question from their private/public ownership talk: Can a lighthouse be privately owned? But then, why would the owners leave the lights on??? They have an answer.
http://www.econtalk.org/archives/2009/11/boettke_on_elin.html

3. Then, finally, in an 11/02 Econtalk interview, Russ Roberts and Michael Heller discuss the “Tragedy of the Anticommons”–where private ownership of such publicly held resources as “airwaves” can lead to less productivity because there are too many owners. (http://www.econtalk.org/archives/2009/11/heller_on_gridl.html)

Posted by: adminEcon
Tags: anticommons, Elinor Ostrom, Michael Heller, Pete Boette, Russ Roberts, ttragedy of the commons
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