Aspects of Compliance in Common Pool Resources

There is an inherent externality across generations in environmental economics: extensive use of the natural environment by the current generation may affect the welfare of future generations. The use of the natural environment includes not only the reduction of resource stocks, like fossil fuels and rain forests, but also the accumulation of pollution stocks. Efficient policy directed to changing the resource extraction and pollution profiles needs to take into account the internal and external forces driving resource markets and their impacts on the aggregate economy. But compliance to these measures is not warranted unless there is an implicit or explicit (or both) enforcement mechanism in place. The traditional approach to discuss the optimal centralized exploitation policy has been to assume that individuals are narrowly self-interested. Empirical evidence suggests, however, that individuals’ characteristics (heterogeneity) play a key role in resolving collective action problems. Chapter 1 develops a dynamic model of common renewable resources management where a centralized mechanism works together with a self-enforcement one—guided by social norms—to form an institution. The results provide a theoretical explanation for the evidence of why economies with abundance of resource stocks may not improve their institutions while others with scarcity of resource stocks may do. Institutional context is likely to determine the impact of trade liberalization on welfare and resource conservation. Chapter 2 follows the recent literature on trade and endogenously determined institution to investigate this link further. It combines a common renewable resource model with elements of moral hazard and identifies conditions under which countries escape the ‘tragedy of commons’. It shows that country characteristics and technologies in alternative sources of income determine how centralized institutions perform and whether there are gains 2 from trade. A key issue underlying global environmental protection is that international trade puts downward pressure on countries’ environmental standards. Chapter 3 explores—within an imperfectly competitive environment—the welfare implications of taxation when production causes environmental pollution (a global public bad) under two tax principles, ‘destination’ and ‘origin’. It shows that the noncooperative environmental tax policy does not always give rise to taxes that are too low in equilibrium, from welfare point of view, and identifies conditions under which the presence of a global public bad tilts the welfare comparison towards, interestingly, either tax principle.