"Free" Resources
Economists assert that we live in a world of scarcity. We have limited resources, and the cost of using them in one way is that we cannot use them in some other way. There are a few exceptions. Salt water is so abundant in the middle of the ocean that all uses of it can readily be met. Ice in Greenland is not scarce. Air is our most important free resource. Because we all get as much air as we want to breathe, air is not normally a scarce resource but a free one.
Sometimes resources appear to be free when they are in fact scarce. When scarce resources appear to be free, people do not take into account some effect that their actions have on other people. Because some part of the effect of their actions is "external" to the decision-maker, these cases are called externalities. Externalities can be positive, which means that there are by-products to a decision that benefit others; or they can be negative, which means that there are by-products that harm others. Public goods are an example of positive externality. The problems of the commons and pollution are examples of negative externalities. Because decisions involving externalities are based on faulty calculations of the complete costs and benefits, they generally are economically inefficient.
Two efficiency problems arise when scarce resources appear to be free. The first is that less may be produced than could be produced with a different pattern of resources use. The economy will, as a result, produce at a point inside of its production-possibilities frontier. The problem of the commons can have this result.
For example, consider Fantastic Fishing Grounds, which are open to all. Suppose that the table below shows how the "production" of fish depends on the number of fishing boats using Fantastic Fishing Grounds. If a boat goes to other areas where no one else is fishing, it can "produce" 20 tons of fish. John Smith is a boat owner, and he must decide whether or not to go to Fantastic Fishing Grounds. If there are already seven boats there, he will find that it is in his interests to go there, too. His choice is between a catch of 20 tons elsewhere or 33 tons at Fantastic Fishing Grounds. But from the point of view of society, this is a poor decision. Adding the eighth boat to Fantastic Fishing Grounds adds only twelve tons of fish to the total catch, whereas sending the boat elsewhere would add 20. The decision to go to Fantastic Fishing Grounds looks good to John Smith because he does not take into account the lost "production" that his decision causes other fishing boats.
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Next we look at a second efficiency problem that arises with scarce resources that are perceived to be free.
Copyright Robert Schenk