AP_Krugman_Textbook

In the case of a common resource, as in the earlier examples involving marginal ex-

ternal costs, the marginal social costof my use of that resource is higher than my marginal

private cost,the cost to me of using an additional unit of the good. Figure 76.3 illus-

trates this point. It shows the demand curve for fish, which measures the marginal pri-

vate benefit of fish (as well as the marginal social benefit because there are no external

benefits from catching and consuming fish). The figure also shows the supply curve

for fish, which measures the marginal private cost of production of the fishing indus-

try. We know that the industry supply curve is the horizontal sum of each individual

fisherman’s supply curve—equivalent to his or her marginal private cost curve. The

fishing industry supplies the quantity QMKTat which its marginal private cost equals

the price. But the efficient quantity is QOPT, the quantity of fish that equates the mar-

ginal social benefit (as reflected by the demand curve) to the marginal social cost, not

to the fishing industry’s marginal private cost of production. Thus, the market out-

come results in overuse of the common resource.

750 section 14 Market Failure and the Role of Government

figure 76.3

A Common Resource

The supply curve S,which shows the

marginal private cost of production of

the fishing industry, is composed of the

individual supply curves of the individ-

ual fishermen. But each fisherman’s

marginal private cost does not include

the cost that his or her actions impose

on others: the depletion of the com-

mon resource. As a result, the marginal

social cost curve, MSC,lies above the

supply curve; in an unregulated mar-

ket, the quantity of the common re-

source used,QMKT,exceeds the

efficient quantity of use, QOPT. D

O

S

MSC

QOPT

POPT

PMKT

QMKT Quantity of fish

Price

of fish

EMKT

As we noted, there is a close parallel between the problem of managing a common

resource and the problem posed by negative externalities. In the case of an activity that

generates a negative externality, the marginal social cost of production is greater than

the marginal private cost of production, the difference being the marginal external cost

imposed on society. Here, the loss to society arising from a fisher’s depletion of the

common resource plays the same role as the external cost when there is a negative ex-

ternality. In fact, many negative externalities (such as pollution) can be thought of as

involving common resources (such as clean air).

The Efficient Use and Maintenance

of a Common Resource

Because common resources pose problems similar to those created by negative exter-

nalities, the solutions are also similar. To ensure efficient use of a common resource,

society must find a way to get individual users of the resource to take into account the

costs they impose on others. This is the same principle as that of getting individuals to

internalize a negative externality that arises from their actions.