Multiple Choice
Making customers pay per use of a public good is inefficient because:
8. The Types of Goods
The Free Rider Problem and the Tragedy of the Commons
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In the case of a shared pasture, what is the rational strategy of herdsmen acting in their own best interests?
A
Have fewer cows
B
Buy more cows
C
Have the same amount of cows as your neighbor
D
None of the above
Verified step by step guidance1
Understand the concept of the 'Tragedy of the Commons', which occurs when individuals, acting in their own self-interest, deplete a shared resource, leading to a worse outcome for the group.
Recognize that in a shared pasture, each herdsman benefits individually from adding more cows, as they receive the full benefit of each additional cow while the cost of overgrazing is shared among all herdsmen.
Consider the incentives: Each herdsman is motivated to increase their herd size because the immediate gain from selling more cows outweighs the long-term cost of overgrazing.
Analyze the Nash Equilibrium in this scenario, where each herdsman chooses to add more cows, assuming others will do the same, leading to overuse of the pasture.
Conclude that the rational strategy for each herdsman, acting in their own best interest without cooperation or regulation, is to buy more cows, despite the negative impact on the shared resource.
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