Common Pool Resources

Updated on April 4, 2024
Article byKosha Mehta
Edited byKosha Mehta
Reviewed byDheeraj Vaidya, CFA, FRM

Common Pool Resources Definition

A common-pool resource is a shared resource not owned by private or public entities. These are natural or manufactured resource systems in which the amount of the resource stock made accessible to each user is not based on any criteria.

common-pool resource

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Common Pool Resources (wallstreetmojo.com)

The resources that are shared among users are often renewable. However, even though this type of item is owned by no one and can be utilized by anybody, there is a finite quantity available. Resources that several users share frequently risk being overutilized or becoming congested due to overuse.

Key Takeaways

  • A common pool resource crosses between public and private goods because it is non-rivalrous and distributed. Still, it is also limited because it has a limited amount available.
  • The ‘tragedy of the commons’ refers to a situation in which individuals, each looking out for their best interests, actually contribute to the depletion of a shared resource by using up more than necessary.
  • Common pool resources are found in several environmental goods and are seen in fishing, water shortages, and air quality rights, among many others.

Common Pool Resources Explained

Common pool resources (CPRs), also known as common goods. They have fundamental traits in common with both private and public goods. These resources are shared by several parties and are non-excludable. It means that people generally cannot be prohibited from using them, regardless of whether they are paying for them. This is the case even if the CPRs are provided free of charge.

They are, however, rivalrous, which means that the use of one of them makes it more difficult for other people to use the same resource in the future. This is primarily attributable to the fact that such resources often consist of a core resource, also known as the stock variable, in addition to more manageable units that may be removed and put to use.

Protocols are often devised to ensure that CPRs maintain their non-excludability and to combat the propensity for overuse or congestion. Most common-pool resources are subject to local regulation, rule-making, and dispute resolution to prevent future overuse or exploitation of the resources. The government normally intervenes or gets involved when disputes over resources are too big for local authorities to handle or when a trade agreement covers the resources.

In some instances, the government must be involved to ensure that overuse or exploitation of the resource does not negatively affect the nation or the larger community or have a global impact.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Characteristics

  • Common pool resources are non-excludable. Indicating that it is tough to stop individuals from using them. Using fish as an example, it isn’t easy to prevent individuals from fishing in a lake several people share.
  • These resources are rivalrous in consumption. All consumers are rivals contending for the good. Each individual’s consumption subtracts from the overall stock of the good that is accessible. Being rivalrous in consumption implies that when one person eats a unit of the good, then that is no longer available for others.
  • Common pool resources are subject to overuse and congestion. It is so because of the combination of two features: non-excludability in supply and competition in consumption. These properties make it impossible to exclude competitors from the resource supply.
  • Users are incentivized to ignore the social costs of their extraction decisions. Mainly when individual and group interests are at odds with one another. The group has to bear the expense of handling, safeguarding, and nurturing the resource. This is because the individual must bear the cost of extracting the resource. Because of this, societies are susceptible to the tragedy of the commons. It occurs when every person attempts to derive the possible profit from a shared resource.

Examples

Let us look at the common pool resources examples to understand the concept better.

Example #1

For instance, fishermen are interested in catching as many fish as possible. If they do not, someone else will; consequently, fish stocks will quickly become depleted without management and regulation.

Similarly, the same river might provide drinking water to several cities. Also, manufacturing firms might not hesitate to contaminate the riverbed if not barred from doing so by legislation, as someone else would bear the expenses.

Example #2

An article by YKA highlights the contribution of common pool resources in mitigating climate change. It states that the ecological restoration of the commons needs to take place. Also, the management of the restored ecosystems needs to be done sustainably. It is imperative that, as an alternative to commercialization and state control, community-based organizations and laws be promoted as mechanisms for the governance of resources.

Communities can strengthen resistance to the effects of climate change and their ability to mitigate them by engaging in communing. However, it implies the management of community resources through group action, inclusive decision-making, and cooperation among many stakeholders.

The resource systems also include the knowledge systems associated with commons; they are an essential component of both. The communities that have historically been responsible for managing the resources possess in-depth knowledge about those resources. This traditional expertise is beneficial to the administration and preservation of commons.

Common Pool Resources vs Public Goods

  • An increase in demand for a common property resource implies that the availability/quality of that resource will suffer. However, despite the growing demand, a public good is still available and has not suffered any quality loss.
  • In contrast to public goods, common-pool resources are subject to competition in terms of consumption.
  • Common-pool resources, also known as open-access and common-property resources, are marked by divisibility, distinguishing between public goods. Additionally, common-pool resources include resources that everyone owns.

Frequently Asked Questions (FAQs)

Why are common-pool resources a market failure?

The limited ability of individuals to exclude themselves from common-pool resources and public goods is the cause of the problem. As a consequence, prices are unable to be set, and as a consequence, private provision through the marketplace is not an option.

What is the common pool resource problem?

The “common pool” dilemma is one of the most significant problems faced when managing natural resources for the long-term benefit of humans. This refers to the inclination of individual users to take advantage of restricted resources to gain benefits that might otherwise go to their rivals.

Why are common-pool resources important?

Common-pool resources are crucial. They make a collection of commodities or resources available to everybody. The risk arises when such resources are exploited to the point where they are rendered at least temporarily useless or substantially less beneficial to other users due to excessive use or abuse.

This has been a guide to Common Pool Resources and its definition. We explain its example, characteristics, and comparison with public goods. You can learn more about finance from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *