Tragedy of the Commons

The tragedy of the commons refers to a situation where individuals, acting in their own self-interest, deplete shared resources, leading to long-term collective harm. This concept highlights issues that arise when externalities—costs or benefits incurred by third parties—are not reflected in market prices. The inherent conflict between individual incentives and collective welfare often demands solutions involving public goods funded by governments or other cooperative measures.

Diagnosing the Problem

To address these challenges effectively, we must first evaluate whether they can be resolved through individual action:

1. Can an individual’s behaviour significantly alter the outcome?
2. If everyone adopted the same behaviour, would the issue be resolved sustainably?

While it has been popular to appeal to corporations to go green, or protect worker rights, consumer price sensitivity means that it is the firm with the lower costs that eventually survive market forces. The romantic notions that a company with a conscience can thrive is often insufficient to keep the company afloat – unless consumers are inherently discerning enough to reward those companies that do not maximise profit at the expense of other stakeholders. For instance, a fair-trade coffee brand may face difficulty in scaling operations due to higher production costs, despite its ethical appeal. As such, unless a company has achieved a critical mass of customers that are willing to pay a premium to support its mission, it will face an uphill battle to sustainable operations. 

Marketing efforts often appeal to consumers’ desire for self-fulfilment, suggesting that purchasing certain products contributes to societal well-being. However, such strategies typically fail to address the mass market. Most individuals are unlikely to incur higher costs to mitigate shared problems, especially if they perceive that others are not contributing similarly. This behavioural inertia exacerbates the tragedy of the commons.

The fundamental lack of demand is masked in good times – when interest rates are low and business confidence is high, companies can stay in the growth stage and bask in the positive media attention. Consumers also have the wealth to pursue brands that identify with their purpose, as their basic needs as the base of Maslow’s Hierarchy have been met. However, in hard times of recession and economic gloom, people abandon their commitment to ESG in a bid to stretch their budget.

BlackRock quit Net Zero Asset Managers, due to membership which “subjected us to legal inquiries from various public officials”, according to the vice-chair Hildebrand. Many top banks have also started leaving a similar group for the banking industry.

The darlings of the pandemic that espoused ESG – Beyond Meat, for instance – are now finding that the absolute functionality and value of the product are far more core to their business than the feel-good factors. Beyond Meat faces customer complaints about taste, nutrition, and high prices. The notion of saving animals from death is just a minor consideration in guiding consumers’ meat demand.

To counteract these challenges, we can harness behavioural tendencies to promote collective action:

1. Herd Mentality: Visible examples of sustainable behaviour can encourage broader adoption. For instance, research shows that living within 500 meters of additional visible solar panels increases the likelihood of installing solar panels by 6.5%.
2. Nudges: Subtle behavioural prompts can influence decision-making. One effective method to reduce energy consumption is sharing data on median usage within a community. Highlighting excessive energy use compared to neighbours often motivates reductions. However, this approach can backfire. Katharine Hayhoe notes that individuals who feel shamed but lack alignment with environmental causes might react by increasing their consumption.

Policy Implications

The tragedy of the commons demonstrates the need for robust policy interventions. These may include:

1. Regulation: Enforcing limits on harmful activities, such as emissions or resource extraction.
2. Incentives: Subsidizing sustainable practices or taxing negative externalities.

By integrating these measures with insights from behavioural economics instead of relying on shaming corporations and their management, we can mitigate the tragedy of the commons and actually move towards a sustainable solution.