Traffic congestion, intellectual property rights (IPRs) and my housemates' tendency to use unfeasible quantities of water and electricity might seem unrelated. But, they are all manifestations of the tragedy of the commons: an economic concept which shows up in all manner of places.
The tragedy of the commons is often described in the context of an 18th century village bordered by a grassy common, where the locals rely on the wool trade for their income. The more sheep a farmer is able to graze, the more wool the farmer can sell. If any farmer wants to use the common, no one has the right to charge them money or turn them away. But if the common is overused, it will be stripped bare and the village will be destitute. Since each farmer benefits from higher wool sales the more they graze their sheep, but only has to bear a fraction of the cost to the village (slightly less grass), the common is overgrazed and eventually depleted. Each farmer has made choices which are sensible on an individual level, but the collective outcome for the village is something which no one would rationally choose.
The upshot of this story is that when property rights aren't allocated and goods are instead held in common, society as a whole sometimes loses out. Everyone has the incentive to appropriate as much as they can of the resource and privatise the benefits. And the opposite occurs with investment: if someone considered investing in the resource, (planting more grass or extending the common) they would very quickly realise that they must shoulder the full cost but will only be able to access a fraction of the benefits. The private and social costs of people’s choices are unbalanced. The result is that people take out too much and put in too little.
How does this relate to Intellectual Property (IP)?
There are two main ways in which the logic of the above example applies to IP. They are both what economists refer to as 'market failures': the first leads to too little investment and innovation, the second to too many restrictions on the knowledge needed as an input to innovation.
It takes time and money to produce an innovation or creative work. But with no IP protection, the benefits of this investment will be diffuse: think of it as extra land for the common. So in the same way as in the example above, the common resource (society's knowledge and technology) doesn't receive enough investment.
On the other hand, if the IP regime allows too many IP registrations, ideas which could feed in to greater innovations risk being appropriated for private gain. Since commonly held knowledge can be freely built upon by others, its enclosure carries a social cost which exceeds the fees and time paid by the applicant.
A patent, for example, encourages people to add to the commons. Continuing with the analogy, in return they can fence off this 'land' for 20 years to exploit it personally, before it becomes commonly held. But since ideas can be used as intermediate steps to bigger ideas, their enclosure may stand in the way of other innovations. Innovation needs both incentives and freedom.
What can be done?
Over time, economists have suggested several potential solutions to the general problem (some more practical than others!). These solutions apply mostly to tangible goods or physical places. One is to divide up the resource and allocate property rights. Another is to tax in proportion to usage, although this is less efficient. The resource could also be administered by an authority with the power to regulate use. Finally, cultural rituals and implicit social threats are probably the oldest solution to this problem. These solutions all work by changing people's behaviour (by aligning private and social interests).
One of the greatest societal challenges is figuring out how to address the tragedy of the commons in a way which is equitable, sustainable and ultimately benefits us all. Going back to IP, the key is balance. The Intellectual Property Offices task is to make the best use of theory and evidence to find the policies which defend both the freedom and the incentives to innovate.
If you have questions or feedback, do comment on this blogpost and we'll do our best to respond.