General Equilibrium Tragedy of the Commons

Abstract

Many poor economies depend on open access resources for their livelihoods. Households in resource-based economies allocate their time and other factors between resource extraction and other activities. As a result, factors may shift from one sector to another as marginal returns change. This has two important implications. First, it implies potentially strong linkages between resource and non-resource sectors. Second, it means that unmanaged resources cause inefficient allocations of inputs across all sectors, and the effects of resource management spill into other sectors. We construct a local general equilibrium model that accounts for inputs that over-allocate to an open access resource and create a general equilibrium tragedy of the commons. This model describes resource rent dissipation more adequately in economies with mobile factors than a model with slowly dissipating rents. Perfectly mobile factors dissipate rent in every period, but endogenous wages cause labor and capital allocations to change with the resource stock. We use the model to illustrate medium-run impacts of a limit on capital in an artisanal fishery in Honduras. Simulation results reveal that fishery management has economy-wide impacts on prices and wages. Managers in developing countries thus should consider these linkages when implementing policies to conserve fish stocks.