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Financial Incentives of Open Access Resource Overuse

This page authored by Chris McIntosh, University of Minnesota Duluth, based on an original activity by Curt Anderson in Economics and the Environment.
University of Minnesota-Duluth, Economics
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Summary

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.

Learning Goals

The goals are to more fully understand why resources can be quickly used when property rights are not established or enforced. Participants can be pushed to consider the financial gains of resource harvest and the impact of that harvest on prices and remaining resources (stocks). While some students may come from relatively high income backgrounds they should be challenged to consider many in the world who require income from resource extraction to buy just enough food or water to live. Any resources available to them literally become a life line and with high levels of competition and no regulation individuals cannot risk waiting for the resource to become more valuable since others are likely to extract it, leaving little left to obtain.

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.

Context for Use

The activity is very flexible. It could be used in a variety of educational levels (middle through college) depending on the depth of discussion you want to pursue. For a more basic discussion see author's notes (intentionally and skillfully written to keep things simple). At the college level, prior knowledge of supply and demand market forces can allow you to go more in depth (as in my goals description). It can be done anywhere there is a small amount of physical space. The equipment and costs are minimal. It is probably most useful as an introduction to the topic of resource exploitation.

Description and Teaching Materials

Please see file. Property Rights and Incentives Activity (Acrobat (PDF) 292kB Jun14 12)




Teaching Notes and Tips

It is important to not discuss the implications of resource use ahead of the experiment. The participants should only consider their financial incentives to achieve the outcomes described above. For example, I would suggest not even using words like "resource" when describing the experiment but instead use "paper clips". You can explicitly tell them their goal is to make as much money as possible. In this way, it is probably best to use the game to introduce the topic.

Assessment

I would suggest that guided group discussion could be very effective. Given the activity is flexible in knowledge level you can choose how in depth to go based on prepared questions. I could also envision a quiz game being designed to gauge individual understanding.

References and Resources


Author Notes

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