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By Root 836 0

It gives you a tasty if modest meal, say, a chicken breast, along with a small side salad. It’s a wee bit spartan, but it’s a very good deal. The other temptations on the menu, such as the lobster, are much more appealing, but their prices are exorbitant. If everybody sticks to the prix fixe menu, the bill will be relatively small. When you divide up the bill, you and your acquaintances will all get a very good deal—a pleasant meal at a cheap price. Alas, that’s probably not what happens. More typically, someone at the party has to be a spoilsport and order the lobster. Lobster-boy thinks he’s pulling a fast one; since everybody divides the bill equally at the end of the meal, the enormous cost of his lobster is shared among the whole crowd. He personally gets the benefit of eating the expensive entrée, but in the process he drives up the cost of the meal for everybody. Sadly, once lobster-boy puts in his order, all bets are off. Everybody starts ordering the overpriced lobster; even a few people who previously ordered the prix fixe special will change their orders. Perhaps a handful of people show restraint and stick to the cheaper chicken, but it’s of no avail. All the lobsters drive the price of the meal up to enormous heights. When the check comes and it’s divided up, the cost is eye-popping. This is an example of the tragedy of the commons.

The tragedy of the commons occurs when an individual can take an action that benefits him, yet the negative consequences of that action are diffused—such as when they’re divided among a large group of people or when they take a long time to materialize. In situations like these, people act selfishly, getting as much benefit as they can, but as a consequence, we’re all worse off. In the restaurant example, lobster orderers benefit from getting the expensive entrée, but the cost is divided among the entire party, making what should have been an affordable, pleasant meal into an outrageously expensive fiasco. Most environmental problems are the result of a tragedy of the commons. Burning fossil fuels, for example, gives the user benefit of cheap, affordable energy, even though each power plant helps warm the planet a little bit—and the consequences of global warming are shared by everybody in the world.

Another example of the tragedy of the commons is all too familiar to urban planners. Since the 1960s, a number of cities around the world have tried to encourage cycling by making bicycles freely available to anyone who wants to use them. It’s a lovely idea; even if you don’t use the bicycles yourself, you benefit from the reduction in automobile traffic. Alas, most of the time, these efforts wind up failing because people abuse the bicycles. In 1960s Amsterdam, most of the free bicycles were stolen within weeks. People are no better nowadays. In 2009, Paris’s free-bicycle scheme was struggling to survive because people were abusing the bicycles. You can find videos on YouTube where young toughs ride the bicycles down stairs and jump them in skate parks. Vandals destroyed quite a few—smashing them, burning them, and tossing them into the Seine. And many others were simply stolen. A year and a half after the start of the Parisian free-bicycle program, more than half of the 15,000 bicycles were gone. The destructive behavior of individuals destroyed a shared resource. Tragedy of the commons is an immutable fact about society. If the benefits of our actions are divorced, to some extent, from their negative consequences, we’re going to take those actions—even if they lead to a very unfortunate outcome for everybody. The tragedy of the commons is a result of human nature, and the moment we ignore human nature we put ourselves at grave risk.

In financial markets, the equivalent concept is known as moral hazard—it’s what you get when you cross the tragedy of the commons with risk mismanagement. When financial gain is divorced from the risks involved in making that gain, very bad things happen. The subprime mortgage meltdown was a great example of moral hazard in action. The individuals who