Financial Incentives of Open Access Resource Overuse
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This page first made public: Jun 14, 2012
This activity helps students understand incentives that create overuse of resources such as when property rights are not well established or enforced. Students are paid to participate in two case experiments. There are two periods for each case. They are explicitly told that the resources are worth twice as much in the second period of each case. In the first case, property rights are non existent and cooperation in the first period tends to break down such that a mad scramble to get a hold of (harvest) and sell the valuable resource ensues. In the second case, property rights are established and enforced such that participants are wiling to undergo a short delay (couple minutes) to earn twice as much per resource unit.
This activity can apply to many situations but examples of oil or gas fields seem most appropriate for a geoscience emphasis. Using these examples we can understand how supply-side effects of technology and exploration can lead to higher production and low prices. These low prices can lead to dependency on a temporarily inexpensive energy source. Eventually, total reserves of non-renewables become low. For a time, competition over remaining resources can again keep production quantities high and prices relatively low (as demonstrated in the first period without property rights). However, low stocks and high demand will lead to an increase in prices. The technological dependency on the resource could make the price increase quite dramatic and lead to a very rough transition to a substitute resource (another non-renewable or renewable). Given we are describing oil extraction this is also consistent with persistently high levels of pollution including large CO2 contributions. Therefore, the financial incentives of the extractors are crucial in considering the business as usual path. Alternative paths should consider benefits and all costs (including pollution, etc.) and the expected outcomes of the alternative paths can be influenced by the incentives provided such as property rights, investments in alternative technologies, fuel and carbon taxes, etc.