Before jumping on the answers let me state that there is no silver bullet solution for this problem, however there are few ways in which you can manage and minimize the impact.
Singapore is a great example of how to solve TOC issues especially in dealing with traffic problems. Broadly there are two ways to contain the problem of TOC.
First, an enforcement body (like government) can use regulations or taxes to reduce consumption of the common resource. Mankiw suggests in his text –
Chapter 22 - Tragedy of Commons | Mental Models, Investing, And You
If the tragedy had been foreseen, the town could have solved the problem in various ways. It could have regulated the number of sheep in each family’s flock, internalized the externality by taxing sheep, or auctioned off a limited number of sheep-grazing permits. That is, the medieval town could have dealt with the problem of overgrazing in the way that modern society deals with the problem of pollution.
This is how the management committee at my apartment complex addressed the issues. They came up with strict rules for pet owners to take the responsibility of cleaning the mess themselves. Of course they had to facilitate poop disposal waste bins which made the task easier. Similarly, management had to come up stringent policies and parking violation fines to control the TOC tendency in car parking problem.
The idea of carbon credits and its trading is to contain the carbon emission (pollution). There are some interesting insights in this article about how social entrepreneurs are working with TOC.
Second way is to turn the common resource into a private good. Mankiv writes –
The town can divide the land among town families. Each family can enclose its parcel of land with a fence and then protect it from excessive grazing. In this way, the land becomes a private good rather than a common resource. This outcome in fact occurred during the enclosure movement in England in the 17th century.
Here is an interesting thought – the attached toilet in your bedroom? Isn’t it a private good? May be one day pet lovers might consider installing dog-loo inside their houses. I think that would be sign of a developed country.
Chapter 22 - Tragedy of Commons | Mental Models, Investing, And You
By the way here is an interesting piece of thought, unrelated to the current topic of discussion (just can’t control the unchained monkey in my head) about characteristics of a developed country (or community) –
A developed country is not a place where the poor have cars. Its where the rich use public transportation.
Interestingly, Garret Hardin seems to be talking on the same lines in this video.
Conclusion
Before writing this chapter I was vaguely aware about the idea of TOC. But in the process of researching I learned a lot of new stuff.
Please forgive me if I have sounded insensitive towards dogs. I don’t hate dogs. I love them especially when they are chasing other people.
Chapter 23
Externalities
About five years back when I moved into my current apartment community, the area around was pretty much empty. The open land and the surrounding greenery attracted me so much that making the decision was a no-brainer.
But I forgot one thing. I should have asked for a guarantee that the greenery will stay that way.
It didn’t take much time for small houses to start mushrooming around the campus. Honestly, I shouldn’t be complaining. It’s a free country and people are allowed to construct houses. But it’s always the second order effects which create unexpected problems.
With inadequate supply of water from the government, came the need for bore wells for every house. I guess you can imagine where this story is going. With bore wells getting installed in some or the other house every few weeks, started the unwanted and unbearably irritating noise emanating from heavy mechanical devices, drilling holes in mother nature’s heart.
I felt I was living in the middle of a 19th century steel manufacturing factory. I had never signed up for this.
In today’s capitalist society, when I want to listen to a song on iTunes, I have to shell out money for it. But if I am forcefully exposed to a deafening, non-musical, and unhealthy sound, why am I not being compensated for it? Who should pay for my misery? The driller, the landowner, or the government? I demand that all of them should, but nobody seems interested.
Chapter 23 - Externalities | Mental Models, Investing, And You
Once someone has bought a piece of land and paid the required taxes and duties, he or she is legally allowed to drill a hole in their land, because they have paid the price. But have they really paid the full price? Does the tax include the ‘cost of inconvenience’ caused by such activities to others?
For many years I have been at the receiving end of quite a few unpleasant noise polluting activities and sadly I don’t remember getting a tax rebate for the same. I am sure I am not alone. It’s a social problem affecting almost everybody in some way or other.
Now before I give a picture of myself as an innocent and helpless victim of such atrocious and violent acts of noise pollution, let me admit that I have been an offender myself. There is at least one instance that my selective memory allows me to divulge.
While getting a pigeon net installed in my balcony, which required drilling at least 40- 50 holes on the shared concrete wall, I ended up creating severe nuisance for my neighbours for couple of hours. And all I had to do was fetch a permission letter from the apartment owner’s association without paying a dime for it.
There’s nothing that my neighbours could do except to wait for their opportunity to put holes in their walls and feel avenged.
So how do we explain this socio-economic aberration?
Sometimes our actions do not have direct costs. These actions can affect others and yet we do not suffer any consequences. The instance of drilling that I just quoted above is a great example of something called negative externality.
Imagine the plight of those living close to airports. They neither get a sound sleep nor a discount coupon from airlines. Or for that matter those living close and downwind to industrial areas emitting toxic gases and air pollutants.
Chapter 23 - Externalities | Mental Models, Investing, And You
So that’s the mental model we’re going to discuss – Externalities. An externality is cost incurred or benefit received by a third party who has no control over the factors that created the cost or benefit.
In other words, externalities are the spillover effects we experience from an economic decision made by someone else. We experience the externalities without paying a price for the benefit or receiving compensation for the cost. Which means externality can be both negative and positive.