Department of Mathematics
Illinois State University
Insurance as a Solution to the Tragedy of the Commons
Tragedy of the commons is an old, yet important problem in economic theory. It refers to the process of depletion of a shared resource by people who act independently and rationally according to their own self-interest, but with possible detrimental effects on other people, and most importantly, depletion of common resource. This depletion happens even with participants’ understanding that depleting the common resource is contrary to the group’s long-term best interests.
There exist three main proposed solutions to this very important problem:
- Arthur Pigou’s tax on activities causing harm to others or depletion of common
- Ronald Coase’s proposal for property rights as a market solution of the problem,
- Elinor Ostrom’s research on community management of common resources.
In this paper, we propose insurance as a solution to the tragedy of the commons.