Some assets are overused or underprovided - why?

Market failures

It is difficult to exclude people from using many of the functions of environmental assets-they are nonexcludable. That means there are no well-defined private (individual or group) property rights, so markets cannot be used to ration the use of these assets or to expand their provision where that would be justified. Without property rights, it is not possible to charge others for the use of a good or service. Therefore not only does an individual or group have little incentive to preserve or provide the asset (since he or they cannot prevent others from using it), he or they have every incentive to free-ride on others' efforts to preserve or provide those assets. From the perspective of society, then, the assets will be overused or underprovided.

Overuse. For some renewable assets that are common property goods (nonexcludable but rival) consumption by one individual or group will reduce the supply for others. Each individual or group can gain from overexploiting it in the short run, but lose in the long run as everyone else does the same and the asset falls below its regenerative capacity. Society then ends up worse off.

As an example of the common property problem, consider offshore fisheries, many of which are greatly depleted by overfishing. The fish biomass of several important fisheries is now a mere tenth of its pre-exploitation level-90 percent of initial stocks have been destroyed.^{62, 63} Although all fishermen would benefit in the long term from a flourishing fishery, individuals tend to act in their own interests and catch as many fish as they can. This is the "tragedy of the commons"-or open access, with users overexploiting what would otherwise be a renewable resource as they race to get their share before others deplete the resource. The same behavior applies to ozone depletion and climate change-clear examples of global common property goods (see table 2.2). As discussed in chapter 8, the emission of ozone-depleting substances, or the use of fossil fuels (and, to a lesser but still important extent deforestation and other land use practices that release CO2 and other greenhouse gasses), results in gases accumulating more rapidly in the atmosphere than natural sinks can remove them. They change the climate in complex ways. Their global effect is the same regardless of where they are emitted. Again, individuals (and individual countries) do not factor in the spillovers of their actions on others.

Underprovision. Knowledge is a public good-since once generated, it is difficult to exclude others from using it (nonexcludable) and consumption by one individual does not reduce the supply for others (nonrival). Individuals or groups have less incentive to invest in generating information and knowledge than is socially desirable. There is a tendency to free-ride, expecting to benefit from a piece of knowledge created by someone else. And since an individual's use of a piece of extant knowledge does not reduce the knowledge available to others, the generation of new knowledge can have large positive externalities or spillovers to society that are not taken into account in decentralized decisions to invest in creating new knowledge. Thus knowledge also tends to be underprovided from society's perspective.

The existence of spillovers (externalities) that are not taken into account by individuals gives rise to the need for a "market for external effects" that can align the marginal costs and benefits to the individual with those of society as a whole-so that individuals take into account their impact on others (internalize the externality). When transaction costs are low, and property rights relatively well defined and perfectly and costlessly enforceable, all affected parties could get together to negotiate an outcome that is efficient from the perspective of society.⁶⁴ Under such circumstances, there is little need for policy intervention.

But generally transaction costs are significant, and for many environmental assets private property rights are difficult to define. The costs of transactions are likely to depend on the number of people involved and on whether the parties are concentrated or diffused groups. (Clearly, not all problems deserve being addressed-sometimes the transaction costs may be higher than the social benefits.) Usually, transaction costs are likely to be higher-and the problem more difficult to solve-when the effects of the spillover fall on a large, diffuse group. The problem is likely to be even more difficult to solve when a small concentrated group (that can organize itself at lower costs) generates the spillover, while the effect of the spillover is borne by a diffused group that incurs higher costs to organize itself because it lacks the ability or voice to negotiate. Solving such problems requires policy interventions and supporting institutions (see the section titled "Correcting the overuse and underprovision of important assets" and chapter 3). And as discussed in the rest of this Report, where such institutions do not exist, it is necessary to find mechanisms or catalysts that may spur their emergence. Table 2.2 shows some examples that are taken up in each of the chapters of this Report, which is organized by space and scale.