Tragedy of the commons: and pigouvian taxes

Human societies have long faced the tension between individual interests and the collective well-being, especially in the use of shared natural resources such as clean air, oceans, and fisheries. This issue was clearly explained by Garrett Hardin in his 1968 essay The Tragedy of the Commons, where he warned that when individuals act in their own self-interest while exploiting a common resource, it becomes overused and ultimately depleted, harming everyone in the long run.

1. TRAGEDY OF THE COMMONS
AND PIGOUVIAN TAXES:
SUBJECT: ENGLISH
A Path to
Sustainable Resource Management
A Path to
Sustainable Resource Management
FACULTY OF ECONOMICS
NATIONAL UNIVERSITY OF CENTRAL PERU

2. ÍNDICE01 02 03 04 05 06 07 08 Introduction The Tragedy of the Commons: Theory and Real-World
Implications Pigouvian Taxes: Theory and Application Designing Effective Pigouvian Taxes Alternatives and Complements to Pigouvian Taxes Global Considerations and Coordination Case Studies and Empirical Evidence Conclusion

3. Human societies have long faced the tension between
individual interests and the collective well-being,
especially in the use of shared natural resources such as
clean air, oceans, and fisheries. This issue was clearly
explained by Garrett Hardin in his 1968 essay The
Tragedy of the Commons, where he warned that when
individuals act in their own self-interest while exploiting
a common resource, it becomes overused and ultimately
depleted, harming everyone in the long run.
To address this, economists have proposed several
solutions, one of the most important being Pigouvian
taxes, developed by Arthur Cecil Pigou.
1.Introduction
INTRODUCTION

4. INTRODUCTION
These taxes aim to correct negative externalities by making polluters pay for the
social cost they generate, thus aligning private incentives with public welfare.
This essay examines both the theory and real-world applications of the tragedy of
the commons and Pigouvian taxes. It analyzes their historical background, economic
models, empirical evidence, and key criticisms. Ultimately, the essay argues that
Pigouvian taxes offer an effective tool to tackle environmental challenges—provided
there is institutional capacity, political will, and global cooperation.

5. The tragedy of the commons arises when
individuals, acting rationally in their own self-
interest, overuse a shared resource, leading to its
depletion, even though everyone ends up worse
off.
A classic example is that of shepherds sharing a
pasture: each benefits by adding more animals,
but the cost of overgrazing is shared by all.
This situation reflects a negative externality, since
the social cost of resource degradation is not
borne by the individual user.
2. The Tragedy of the
Commons
Without regulation or proper incentives (like
property rights or pricing systems), the resource
becomes exhausted.
Real-world cases include overfishing and air
pollution, where the lack of control results in
collective harm.
Hardin proposed "mutual coercion agreed upon by
the majority" as a solution, which led to the
development of tools like quotas, tradable permits,
and Pigouvian taxes.

6. Pigouvian taxes, proposed by Arthur C.
Pigou, aim to tax activities that create
negative externalities by an amount
equal to their marginal social cost. This
discourages harmful behavior and aligns
private interests with public welfare.
For example, a factory polluting a river
would pay a tax per unit of pollution,
giving it incentives to reduce emissions
or innovate cleaner processes. 3. Pigouvian Taxes:
Theory and Application

7. Compared to rigid
regulations, Pigouvian taxes
are more efficient and flexible,
as they allow polluters to
decide how best to reduce
their environmental impact
based on their own cost
structures.
A key application is the carbon tax,
which many countries impose per ton
of CO₂ emitted. Nations like Sweden,
Canada, and Switzerland show that
such taxes can reduce emissions
without harming economic growth.

8. Although Pigouvian taxes are theoretically
efficient, their practical implementation faces
challenges:
1.Estimating the true social cost of
externalities is complex, especially for long-
term issues like climate change.
2.Regressive effects: these taxes can
disproportionately impact low-income
households, who spend more of their income
on taxed goods like fuel.
3.Public acceptance
and revenue use:
if revenues are
poorly managed
or seen as unfair,
opposition may
arise.
4. DESIGNING EFFECTIVE PIGOUVIAN TAXES
CHALLENGES
4. Designing Effective Pigouvian Taxes
RECOMMENDATIONS
To address these issues, it is recommended to:
Combine taxes with social compensation (e.g., transfers
or rebates),
Use revenues for green technologies or public dividends,
Ensure transparency, citizen participation, and clear
communication.
France’s 2018 Yellow Vests protests illustrate the risks
of neglecting these design aspects.

9. 5.1. TRADABLE PERMITS
(CAP-AND-TRADE SYSTEMS):
5.2. COMMAND-AND-
CONTROL REGULATIONS:
While Pigouvian taxes are powerful
tools, they are not the only means to
address the tragedy of the commons.
Other policy instruments include:
5. Alternatives and Complements
to Pigouvian Taxes
5. ALTERNATIVES AND COMPLEMENTS TO PIGOUVIAN TAXES
A total emissions cap is set, and
pollution rights are traded. Example:
the EU Emissions Trading System.
These impose strict limits
or technology standards.
While less efficient than
taxes or
permits, they are
sometimes necessary for
pollutants with
immediate or severe
effects (e.g., lead or
mercury)

10. 5.3. SUBSIDIES FOR GREEN
TECHNOLOGY:
5.4. PROPERTY RIGHTS AND COMMUNITY MANAGEMENT:
5. ALTERNATIVES AND COMPLEMENTS TO PIGOUVIAN TAXES
Governments can encourage
environmentally friendly behavior
by subsidizing renewable energy,
electric vehicles, or energy-efficient
appliances.
In some cases, defining clear property rights or empowering local
communities can prevent resource overuse. Elinor Ostrom’s work
showed that commons can be sustainably managed by user groups under
the right institutional conditions.
These tools are not mutually exclusive—combining
them often yields better results in terms of
efficiency, environmental impact, and political
feasibility. Still, Pigouvian taxes remain central due
to their simplicity and market alignment.

11. Global carbon pricing schemes,
6. Global Considerations and Coordination
Environmental externalities often cross national
borders, so unilateral actions by a single country may
not be enough. For example, a nation that adopts
carbon taxes may face carbon leakage, as industries
relocate to countries with looser regulations.
To address this, international coordination is
essential. Key strategies include: Carbon Border Adjustment Mechanisms
(CBAM), which tax imports based on their
carbon footprint (as implemented by the EU),
International agreements like the Paris
Agreement, encouraging emission reduction
commitments,
Financial and technological support from
developed to developing countries, facilitated
by institutions such as the World Bank and
IMF.
However, challenges persist due to differences in
institutional capacity, national priorities, and levels
of development. For Pigouvian taxes to be globally
effective, solidarity, technology transfer, and
financial aid are critical.

12. As noted, Sweden’s carbon tax began in 1991
and is among the highest in the world. Despite
this, Sweden has seen continued economic
growth and reduced emissions, showing that
environmental taxes can be compatible with
prosperity.
SWEDEN
7. Case Studies and Empirical Evidence
Several countries have adopted Pigouvian taxes with varying degrees of success. A comparative look
provides insights into best practices and common pitfalls:
BRITISH COLUMBIA (CANADA)
Implemented in
2008, this carbon tax
is revenue neutral,
returning all
proceeds to the
public via tax cuts
and rebates. Studies
show that the policy
has reduced fuel
consumption and
emissions without
harming economic
performance.

13. In contrast, countries with high reliance on fossil fuel revenues or weak governance have
struggled to implement or sustain Pigouvian taxes. The case of Nigeria, where fuel
subsidies remain politically entrenched despite economic inefficiencies, highlights the
difficulty of reforming entrenched systems.
These examples suggest that successful Pigouvian tax implementation requires careful
attention to context, public acceptance, and institutional design.
Transparency, gradual implementation, and earmarking revenue for public benefits can
enhance political feasibility and durability.
The proposed fuel tax hike in 2018 failed due
to public backlash. The lack of accompanying
compensations and a perception of unfairness
fueled protests. The failure demonstrates the
importance of equity considerations and
political communication.
FRANCE
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CHILE
As one of the first Latin American countries to
introduce a carbon tax (in 2017), Chile applied
a modest tax on large sources. The initiative is
part of a broader strategy that includes green
energy incentives and environmental education.

14. The tragedy of the commons remains a major challenge for modern environmental and
economic policy. As populations grow and pressure on resources increases, it becomes
essential to internalize negative externalities.
In this context, Pigouvian taxes stand out because they:
Are economically efficient,
Generate public revenue,
And offer flexibility, letting polluters choose how to reduce their impact.
However, success is not automatic. It depends on:
Proper design (accurate pricing, social fairness),
Strong governance and transparency,
And international cooperation.
Though not a one-size-fits-all solution, well-designed Pigouvian taxes—combined with
other policies—can align private incentives with the public good, protecting common
resources like air, water, and biodiversity.
Given today’s environmental crises, adopting such measures is not only desirable, but
essential.
8. Conclusion

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