3 The Governance Problem

3.2  A typology of goods

In many everyday situations, there exists a dilemma, between what is best for the individual and what is best for the group. For example, it would be beneficial for an individual to be able to use a siren so that all the other cars on the road will pull over, allowing the one with the siren to get from point A to point B as fast as possible. It would also be beneficial to an individual not to pay taxes (at least in the short term). Nevertheless, society would not function if everybody used a siren when they drove or did not pay their taxes. In general, society will not function if individuals do only what is best for themselves alone. This is called a social dilemma. It has often been argued that what is best for the individual is best for society. The key to this claim is that it is true for perfectly functioning markets which only exist in theory– they do not, and cannot exist in the real world.

The commons dilemma discussed in Chapter 1 is an example of a social dilemma. We now discuss the broader scope of social dilemmas. We will see that social dilemmas lead to the prediction that people will not contribute to the common good or will overharvest from shared resources. These predictions are based on a very narrow notion of human behavior, namely that everyone behaves as selfish rational beings. Empirical studies provide a more nuanced perspective and find that many people are conditional cooperators. Nevertheless, it helps to think about social dilemmas using the naïve model of decision-making. It will point to some potential problems related to social dilemmas in which we have to make choices.

The very existence of Wikipedia demonstrates that we do not all behave as selfish rational beings. Many people now use Wikipedia because it is a very powerful resource with high-quality information on many topics. There are far fewer people who write articles for Wikipedia than there are people reading Wikipedia articles. Those people who only consume Wikipedia “free ride” on the contributions of others. Those who write articles spend time (experience a cost) to do so. Luckily there are enough people willing to make a contribution voluntarily in order to have a very useful product. If people really are fundamentally selfish, why do you think these individuals contribute to Wikipedia?

Many social dilemmas are related to the production or consumption of goods. In this section, we describe different categories of goods and how rules relate to them. We can use two attributes, exclusion and subtractability, to distinguish four basic categories of goods and services (Table 3.1).

Exclusion relates to the difficulty of restricting the use of those who benefit from the resource or service. Subtractability refers to the extent to which one individual’s use subtracts from the availability of a good or service for consumption by others. Different levels of exclusion and subtractability define different categories of goods. So what do these dimensions actually mean for goods and services? Let’s discuss the different dimensions in more detail.

• Subtractable: The use of a good or service by one participant in an action arena reduces the availability of the good or service to another participant.Examples: A fossil fuel, like oil for example, is a non-renewable resource that is used for many energy sources. The gallons of gasoline that you put in your car cannot be used by somebody else after you have burned the gasoline during your trip. A more direct example is a cake you have made for your friends. Every piece of cake eaten by one person is not available for somebody else. This is related to the old adage “you can’t have your cake and eat it too.”
• Non-subtractable: The consumption or use of the good or service by one participant in the action arena does NOT reduce availability or utility of the good or service to another participant.Examples: Reading an article on Wikipedia does not reduce the availability of the article for somebody else. Many information goods like movies, photos, books, and scientific knowledge have this property.
• Excludable: Any excludable good or service is one that a participant can be prevented from accessing if they do not pay for it, or have passed another form of entry/access barrier.Examples: Going to the movies requires you to buy a ticket to get access. The movie theater is constructed in such a way that the formal requirement of having a ticket can be translated into the real-world outcome of being prevented from entering, i.e. being excluded from the movie theater. Some websites require you to sign up, like Facebook. You can be excluded if you are too young or have misbehaved in the past. As with the movie theater, excludability on a website requires that the infrastructure be constructed in such a way that a formal measure like requiring a password (a ticket, or more generally a ‘token’) can be translated into the desired practical outcome.
• Non-excludable: Any good or service that a participant cannot be prevented from accessing or it is extremely expensive to exclude.Examples: Public roads are available to all cars, even though not all participants pay taxes for the maintenance. It is very costly to deny fishing boats access to the oceans, especially outside the control zones of countries. This makes an ocean fishery very difficult to regulate. This relates to the excludability examples above. We may define a formal requirement of a permit (a ticket, password, or token) to fish, but this has little practical effect without the infrastructure required to translate it into action. Imagine trying to wall in a fishery like a theater, or patrol a large open air theater with no fence like a fishery.

When we combine these two dimensions we can define four different theoretical categories of goods (Table 3.1): private goods, club goods, public goods and common-pool resources. We will discuss below examples of each of these categories.

Let’s start with private goods. One can restrict the use of the good easily and when that good is in use, someone else cannot use it. For example, a mobile phone or a car is a private good (Figure 3.1). You can restrict the use of these goods by having password protection or a key. If somebody else takes the private good you can go to the police to report a theft. If you are driving your car, no one else can drive it. If you are making a call on your mobile phone, others cannot use it during your call. Hence private goods are the typical products we own as an individual. Can you think of examples of private services?

The second type is club goods. Compared to private goods, the use of the club good by one person does not affect the use by others. Examples of these so-called club goods are streaming services like Netflix, cinemas, and toll roads (Figure 3.2). Access is restricted to “members of the club,” but those members can consume the same product. For toll roads, it means that you pay a fee to use the road, moviegoers pay a price for a ticket to watch a movie during a showing, and Netflix users need to pay a subscription fee (and not share their account information with other households).

The provision of goods is more difficult for those types of goods for which it is challenging to exclude consumers. Public goods—open-source software, Wikipedia, clean air—can be used by everybody, and use by some does not reduce the ability of others to use it. The challenge associated with providing public goods is having a sufficient number of people to invest in their provision. There is a temptation to “free ride” on the contributions of others. Due to the potential for free riding, there might be an underinvestment in public goods. Consider for a moment whether the roads in your city in good condition and are there enough of them? Are there enough parks and open spaces?

A public road is open to all, but not everybody has necessarily provided a significant contribution to its construction, which is financed by various types of local and federal taxes. On a toll road, each user must pay to get access to the road, but access to a public road is not restricted to those who pay for it’s use upfront. The same comparison is true in pay-per-view versus public television. The same physical product can be offered as different types of goods, by changing the rules governing who has access to the good. A public library is a public good for those who want to read a book or newspaper in the library. If you want to take a book home for a limited amount of time, you need to become a member of the library. But if you check out a book from the library no other patron can use that book. So how then is the library a public good? Although the book is available, some coordination is still needed to make the physical objects available for a limited time for those who ask for it.

The final example is a common pool resource, such as a lake, an ocean, an irrigation system, a fishing ground, a forest, the Internet, or the stratosphere. These are natural or constructed resources from which it is difficult to exclude or limit users once the resource is provided by nature or produced by humans. One person’s consumption of resource units, such as water, fish, or trees, removes those units from what is available to others. Thus, the trees or fish harvested by one user are no longer available for others. The Internet has a limited capacity to move all the information around. Bandwidth that is used by some to watch movies may cause delays in the sending of email by others. The many satellites required for communication (along with space debris from the past) is causing problems for new operations in space.

When the resource units produced by a common-pool resource have a high value and institutional rules do not restrict the way resource units are appropriated (an open-access situation), individuals face strong incentives to appropriate more and more resource units eventually leading to congestion, overuse, and even the destruction of the resource itself. Because of the difficulty of excluding beneficiaries, the free-rider problem is a potential threat to efforts to reduce appropriation and improve the long-term outcomes achieved from the use of a common-pool resource. If some individuals reduce their appropriation levels, the benefits they generate are shared with others whether the others also cut back on their appropriation or not. Some individuals may free ride on the costly actions of others unless ways are found to reduce free-riding as an attractive strategy. When free riding is a major problem, those who would be willing to reduce their own appropriations for the benefit of all, provided others would reduce as well, become unwilling to make such a sacrifice for the benefit of a large number of free riders.

Space on Earth is a resource too (Figure 3.3). You have, no doubt, experienced the heavy appropriation of space on the road during rush hour. If enough people drive to work earlier or later than rush hour, this would free up space for others motorists. But who wants to arrive an hour early to work? Or take the bus—an option that might not be convenient for everybody as many people prefer the privacy and control of driving their own car. Hence, the next time you experience a rush hour traffic jam, think about the options everybody has. Due to the free-riding behavior, all of the drivers experience lower performance of the road.

Let us return to the question of how (or whether) the library is a public good. We have also said that roads are a public good. But we have also mentioned the fact that roads and libraries can become congested. Doesn’t that violate the non-subtractability of the resource? It turns out that there are very few examples of pure public goods or any of the other goods for that matter. Typically public goods provide multiple streams of services with different characteristics. Further, they must typically be combined with other types of goods to produce a final service. For example, a road isn’t much good without a private car, public bus, private scooter, etc. Thus, it is better to think of a road or a library as shared infrastructure that makes available common-pool resources. In the case of the road, the common-pool resource is transportation space (or capacity). In the case of the library, the common-pool resource is book contact time. The reasonable use of these common-pool resources typically involves solving coordination dilemmas in space and time. Sometimes, three or more types of infrastructure (goods) are combined. Take, for example, the iPhone.

The iPhone itself is a private good. It is useless, however, without a network. The contract you have with the telephone company enables you to use their infrastructure (a club good) to make calls. Many apps can be downloaded for free and used on an iPhone. The ecology of free apps really are pure public goods since they are available without restriction, at least if you have the proper technology to run it. Finally, if many people use their iPhone to watch movies, the wireless bandwidth gets crowded. This is exactly like cars crowding a road: information bits crowd fiber optic and copper cables. The so-called “bandwidth” is a common-pool resource that is made available by telecommunication infrastructure and if too many people start downloading movies the available bandwidth is completely consumed and the wireless signal is not available for anyone else.

As we conclude this section, we encourage the reader to reflect on how different types of goods (which we can also refer to as infrastructure) must be combined to produce any final service. Yosemite is a “public good.” But unless it is combined with roads, cars, or planes, what services can it provide? For some, it does provide a truly pure public good simply in the idea that such a beautiful place exists. For most, Yosemite is, in fact, a piece of shared infrastructure that provides a common-pool resource consisting of “nature viewing time” exactly as the library is a piece of shared infrastructure that provides a common-pool resource consisting of “book viewing time.” Understanding the subtle nature of how almost all final services are provided by a complex combination of the different types of goods we have discussed in this chapter is a critical prerequisite for designing institutions to wisely govern their use.

3.3  Critical reflections

During the past several decades, delegates from all over the world have come together for conferences on climate change to reach agreements on emissions reduction (Figure 3.4). Every few years there is a critical conference on climate change, and every time, thus far, the agreements made are limited and do not result in actual changes that bring about emission reductions.

Climate change is a very challenging problem since we cannot exclude anyone from using the atmosphere to dump their carbon waste (we all do it every time we take a car, bus, or plane ride). Nor can any individual or group really shield themselves from the consequences of climate change. Thus, solutions will require that a large number of people change their behavior at a cost to themselves, for the benefit of everyone—a classic social dilemma. Moreover, the benefits will only be experienced decades later by future generations. If we cannot solve the climate change problem through negotiations at the international level, at which level of organization might we attempt to address the problem?

Social dilemmas and governance challenges can happen at different levels. As we see later in this book, we have a good understanding how communities can be successful in governing their shared resources. We don’t have that same level of understanding with larger scales, where there are more actors, and many of those actors have overlapping responsibilities and authorities.

For example, the Colorado River passes through five states in the U.S. and two states in Mexico. Actions of the upstream states affect the downstream states. At the time of the writing of this book, the southwestern region of the U.S. had been experiencing a drought for many years and this led to tensions over water availability for the different states. The U.S. Supreme Court has ruled on the allocation of Colorado River water, but that allocation was based on a period of higher-than-average water supply and much lower population densities. What will happen when Lake Mead dries up and less water is allocated to Arizona? In 2022 and 2023 the water allocation to Arizona has been reduced, which have to be absorbed by the agricultural sector (in line with the rules). At the time of writing this book there are tough discussions going on how to reduce use in the agricultural sector. With the consequences of the decades-long drought in the US south-west becoming visible, the government of Arizona is investing in other water sources? Will they also aim to reduce water demand? Will upstream states be requested or required to reduce their water use? Who will enforce this?

The allocation of Colorado River water is a traditional case of the problem of scale. The governance of rivers that cross state and/or national borders can be problematic as a result of the fact that there are many actors from different jurisdictions with different regulations that don’t align well trying to work together to solve many problems. For examples, check out the website. It is not uncommon that organizations are created to focus specifically on the governance problems of a particular river, as happened with the Rhine River in Europe. In the 1980s the downstream country, the Netherlands, experienced major problems with the pollution caused by upstream nations like Germany and France. In order to solve the problem, regulations had to be implemented in different countries. The main costs of the regulations fell to the upstream countries and the main benefits were enjoyed by the downstream countries. Such a policy involving a complete mismatch between costs and benefits of the individual stakeholders could not be implemented unless there is coordination, monitoring, and enforcement at the river basin level.

3.4 Polycentric Governance

As we have seen in previous examples, the governance of shared resources in larger systems can become complicated. A bottom-up approach might be problematic due to a lack of coordination among different actor groups and an inability to constrain actions of particular actors that negatively affect the welfare of others. A top-down approach might solve the coordination and enforcement problem, but may involve a big separation between the resource users and public infrastructure providers, making the transmission of information across levels of organization difficult. As such, top-down approaches may be less effective in monitoring and enforcement and may lack knowledge in creating institutional arrangements that fit the local conditions. A third approach is polycentric governance.

Polycentricity refers to a social system composed of many decision centers having power to make decisions. Each decision center has a limited and autonomous set of prerogatives (rights and privileges) over certain sets of potential actions, and operate under an overarching set of rules. The concept was developed in the 1950s and 1960s by scholars focusing on governance of metropolitan areas (i.e., to provide policing, road maintenance, etc.). For a metropolitan area it might be effective to have just one crime lab rather than one in each neighborhood. But for a typical police officer, it is important to have a police station in each neighborhood instead of one centralized police station. For the performance of the police it is important that officers have access to local knowledge and connections with the neighborhoods both of which cannot be achieved if they are housed in one central police station. For different functions there might be infrastructure at different scales, and each function might have its own rules and regulations on how the infrastructure is supported. For example, schools in the U.S. are supported by tax revenue at the school district level, and thus richer neighborhoods often have schools that have better infrastructure. Further, if infrastructure is more desirable in other neighborhoods, we may observe families moving between neighborhoods setting up a vicious cycle. People who can afford it vote with their feet. Those who can’t, are stuck. To avoid major inequalities between neighborhoods, tax revenue at the metropolitan level might be distributed to help schools in poor neighborhoods.

The United States of America, for example, is organized as a polycentric system. The 50 states have their own rules and a certain level of autonomy to make specific types of decisions. This can be observed by differences in regulations, from death penalties to recreational marijuana use. For many types of problems, states have authority to implement laws and regulations that are consistent with the attributes of the local population. Certain problems, such as national security, national currency, and trade agreements, cannot be addressed at the state level and this will be addressed at the federal level.

Which level is the proper level of authority is not without controversies. For example, due to the decision of the federal supreme court, same-sex marriage is now allowed in each state. Before the supreme court’s decision same-sex marriage was allowed in a select number of states. Some people argue that the meaning of marriage should be regulated at the state level (i.e., is a matter of states rights), and do not agree that a federal mandate should be imposed on a state. On the other hand, before the federal ruling a married couple who moved to another state may have experienced different regulations, which could have had major consequences for that family.

3.5  Critical reflections

Social dilemmas are situations in which two or more participants can benefit collectively from cooperation, but an individual who is selfish and rational can also benefit from free-riding on the cooperation of others. Four types of goods can be distinguished based on the extent to which it is possible to exclude others and the subtractability of the resource: private goods, toll (or club) goods, public goods, and common-pool resources. In this book, we will mainly look at problems of public goods (underinvestment) and common-pool resources (overuse).

In this chapter, we have also considered the challenges of governing systems at larger scales. Who has the authority and the knowledge to create effective policies? Governance structures at different levels influence each other. To address national level problems, does not mean we should only focus on national level policies. In fact, bottom up initiates could create a platform to solve problems at a higher level.

3.6  Make yourself think

1.  What are examples of public goods and common-pool resources you have experienced lately?

2. Why is access to a resource a key component in defining the four types of goods?

3. List some examples where poor communication between multiple levels of governance has caused a problem for you, a family member, or a friend.

3.7  References

Aligica, P. D. & Tarko, V. (2012). Polycentricity: From Polanyi to Ostrom, and beyond Governance, 25(2), 237–262.