Government Actions And The Tragedy Of The Commons Essays Example

Negative externalities are also referred to as social costs. These result from any particular activity or transaction that causes harm to a third party, which is not involved in the activity in the first place. These costs or expenses are generally not included while computing the cost of production of an organization, reason being, production costs are measured in financial terms thus, social costs are overlooked. For instance, a firm decides to open up a factory in a particular area. It will calculate all associated costs of starting up a new factory but would fail to consider the costs that the residents will incur due to both pollution and the drinking water being contaminated as a result of dumping of factory waste.
Cost of production simply represents individual or private costs. Since, these costs are lower than the social costs; firms produce more and more goods to earn higher profits. In such cases, government action becomes necessary, and government intervention can lead to more efficient outcomes in the presence of negative externalities. The government has two options; it can either use regulation or employ market solutions. By the use of policies such as pollution penalties, environmental taxes, allowing civil lawsuits by aggrieved private parties to recover their losses/damages, etc., the regulatory bodies can achieve two things. First, they can recover funds to restore the damages caused and second, this enables them to put a financial ‘price’ on negative externalities ensuring that organizations take into account social costs when calculating their cost of production. The economic theory, ‘Tragedy of the Commons’ also reflects the concept mentioned above. The theory was put forward by Garett Hardin. The theory states that individuals act according to their self- interest without taking into account the best interests of an entire group, by diminishing a common resource such as the atmosphere, ocean, forests, fish stock, oil and other energy resources which are not/less formally regulated.
A free market economy in its purest form is based on the doctrine of capitalism, and one of the inherent flaws of this ideology is that it lacks ways of dealing with the Tragedy of the Commons. Many supporters believe that the mechanism of the invisible hand is enough for saving us from the future troubles that depleting resources may cause. In other words, capitalists would always opt for immediate gains even if they are temporary or at the expense of limited availability of resources, in the long run.
However, the government should step in and regulate the market environment to prevent negative externalities that are harmful for the overall well-being of the society. As mentioned earlier, the government can issue directives on the amount of harmful gasses and chemical fumes that manufacturers can emit, this can be implemented through legislation. In addition to that, the government may also issue permits and give special permission to firms. Furthermore, the government can tax goods with externalities. This way the private costs for the firm would increase and will account for any social costs as they will now be stated in monetary terms in the cost of production.
The challenge of common pool resources requires confrontation on the part of the government and the regulatory authorities. Hence, government intervention in such cases is necessary. These resources are held collectively by all members of a society therefore, no private firm can claim the resources to be theirs completely.