THE Tragedy of the Commons is a concept that is introduced in introductory Economics courses everywhere around the world. In essence, it highlights the potential pitfalls of resource (mis)utilisation that can occur when the needs of the self overwhelm the needs of the community. It is one of the most powerful arguments for economic regulation and is widely applicable to many instances of resource mismanagement.

To be clear, the Tragedy of the Commons is but a specific instance — resource misallocation — of the general case where an individual’s desire to pursue “rational” self-interest leads to the detriment of the community in which the individual belongs. While there is a moral lesson in this somewhere, there is also an economics lesson — even pure, free market competition, sans oligopolies and monopolies, may lead to suboptimal outcomes from the perspective of the collective.

This is best illustrated by an example from nature, well put forward by the economist Robert Frank. Consider the bull elk. Male members of a herd compete for mates via an all-out battle using their antlers. Furthermore, given that bull elk do not practise monogamy, the reward of defeating other male members in terms of being able to pass along their genetics is even larger. Thus, it is in every individual male’s interests to have as large antlers as possible. Indeed, the antlers of male bull elk are about four feet wide and weigh approximately 20kg.

As a thought experiment, suppose that you were a bull elk and you had antlers four feet wide, weighing 20kg. You are the chief of the herd, having defeated all male competitors for the “right” to pass on your genetic traits.

Now, let us suppose that you were in a dense area of the woods — the natural habitat for elk — and a pack of timber wolves saw you and chased after you because you look delicious. Would you rather have your current set of antlers in that situation, or would you rather have a set of antlers that was maybe two feet wide, and weighed 10kg?

 Therefore, while the individual’s incentive is to have the largest possible set of antlers, it would be in the collective’s interest — in this case, the bull elk species — to have, as a collective, smaller antlers overall. After all, it is not the absolute size of the antlers that matters, it is the relative size.

If all the bull elk reduced their antler size by half, from an individual’s perspective, nothing would change; the bull elk with the relatively largest antler size would still win the genetic contest but the species as a whole would be safer from timber wolves.

Thus, while imperfect competition may distort markets and lead to suboptimal outcomes, so too may perfect competition. A couple of real world (human) illustrations may better highlight this point. Consider the case of professional footballers. By the laws of the game, footballers are required to wear shin guards as part of their equipment. Yet, how many footballers actually grew up learning the game with shin guards?

Their ball control, passing, skills and so on are a product of shin guard-less playing. It stands to reason therefore that playing without shin guards may give some players a competitive advantage for straightforward reasons — they are uncomfortable, they can be bulky.

Thus, by pure competition, it is in each individual’s interest to not wear shin guards. However, this increases the probability of serious injury in the event of a tackle gone wrong or even tackles gone right. Some players may believe it is worth the risk and choose to forgo shin guards, giving them a distinct competitive advantage over those who do not wear shin guards.

However, competition will lead all players to forgo shin guards, assuming shin guards are to the detriment of their playing style. Since the wearing of shin guards offers a relative advantage over those who do not wear shin guards, everyone would be better off if that relative advantage was regulated away.

Fifa, in 1990, made it a requirement for all players to wear shin guards, thereby reducing the pressure of gaining a competitive advantage at the risk of a higher chance of serious injury from playing without shin guards. With the ruling, nobody has a competitive advantage vis-à-vis shin guards and everyone is more highly protected from dangerous tackles overall.

Another good example of this is political campaign expenditures. Consider, for instance, a case where there were several competitors in the political scene. Let us further suppose that the size of the political campaign is positively correlated with both the amount of funding spent on the campaign and the amount of votes it garners. Thus, it makes sense for individual political parties to divert as much funds as they possibly can towards their political campaigns.

However, what matters in this case, again, is not so much the absolute quantum of funds devoted to the political campaign, but the relative quantum of funds. Political Party A just needs to spend more than the other political parties; it does not need to spend a particular quantum. Thus, all political parties would be better off if there was a limit to political campaign spending.

Since everyone is to abide by the same rules, no one has a competitive advantage vis-à-vis their internal resources. Consequently, the funding that would have been used for political campaigns could be used for other purposes, perhaps extra focus on the issues of constituents, philanthropy, training for politicians and so on. Thus, even in the case where perfect competition was allowed to flourish, there is room for a Pareto Improving outcome in equilibrium.

This logic holds in many other instances — nuclear arms races, angpow giving at weddings, Valentine’s Day, tuition for children, and so on. While it is difficult for any one individual to make a decision that benefits the community at the expense of her own competitive advantage (and thus, no one will), it is worth framing issues in terms of the individual and the community such that all individuals in that community are aware of the possible friction that arises from competition.

It is only via collective action that we can achieve community-optimal outcomes. Perfect competition in markets, while desirable in some instances, may fail to achieve that. It is worth keeping in mind that, after all, the goal of any economic and political system is to achieve particular ideals, however defined, and thus economic and political systems are but the means to an end, and not the ends in themselves.

Nicholas Khaw is an economist-in-training at Harvard Kennedy School. Prior to this, he was an assistant vice-president of the research division of Khazanah Nasional Bhd.

This article first appeared in Forum, The Edge Malaysia Weekly, on March 9 - 15, 2015.

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