John Denton: The Tragedy of the Commons: Self-interest and NZ Politics

One of the more interesting paradoxes in economics is that individuals pursuing their own economic interests can collectively produce an outcome that leaves everyone worse off. This is the tragedy of the commons.

The idea was first clearly formulated in 1833 by William Forster Lloyd, an Oxford professor of political economy, as follows.

Suppose ten farmers share a pasture capable of sustainably feeding 100 cows. Each farmer owns ten cows, but then one farmer realises that introducing an eleventh cow will increase his personal income.

Although the additional animal places extra pressure on the pasture, the cost of any resulting damage is shared among all ten farmers. All of the economic benefit accrues to the owner of the extra cow, but he bears only 10% of the associated cost.

Naturally, the other farmers then reach the same conclusion, each adding more cattle until the pasture becomes overgrazed, productivity declines, and eventually everyone is worse off.

The tragedy is that no farmer is behaving irrationally or irresponsibly. Each acts in his own economic interest. Yet the collective result is economically destructive.

Economists describe this as a negative externality: a cost imposed on others but not fully reflected in the individual's economic calculation.

The tragedy in practice.

Modern research provides compelling evidence of the same economic phenomenon in everyday life.

In The Tragedy of the Common Heating Bill (2026/26), economists Harald Mayr and Mateus Souza examined Swiss apartment buildings where residents shared heating costs.

Take 20 apartments sharing an electricity bill equally. If one resident consumes an additional $100 of electricity, the costs are distributed as follows:

Economic consequence	Amount
Additional electricity consumed	$100
Resident's 1/20th share of additional cost	$5
Cost transferred to the other 19 residents	$95
Percentage of cost borne by the consumer	5%
Percentage borne by neighbours	95%

One resident receives the full benefit of the additional electricity while bearing only 5% of its cost. There is therefore a powerful incentive to consume more electricity than would be economically justified if that resident paid the entire bill.

This is precisely the mechanism identified by William Forster Lloyd nearly two centuries ago. Substitute electricity for grass and apartment residents for farmers, and the economic principle is identical.

The individual behaves rationally in pursuing personal benefit, but the collective result is excessive consumption and higher costs for everyone.

Incidentally, in the Mehr/Souza research, when individual metering and billing were introduced, heating expenditure in the entire apartment block fell by approximately 17%.

The Wider Economic Implications

The significance of these examples extends across society and the same underlying incentives arise whether the shared resource is a collectively funded service or a pool of public money, the economic question remains the same: who receives the benefit, who pays the cost, and what incentive does that create?

The enduring significance of the tragedy of the commons is that economic systems can produce collectively damaging outcomes when private benefits and shared public costs become disconnected.

The Tragedy of the Democratic Commons

There is, potentially, a much more consequential application of the tragedy of the commons: the operation of democratic government itself.

In Lloyd's village, every farmer had an incentive to increase his cattle numbers because he received the full benefit while sharing the costs with his neighbours. In the apartment building, every resident had an incentive to consume additional electricity because most of its cost was borne by others.

Does exactly the same incentive exist in a democracy?

And the answer is yes, with every voter having an economic incentive to minimise their personal taxation while maximising the benefits they receive from government expenditure.

We want better healthcare, more generous pensions, improved public services and greater financial assistance, but the majority would prefer that somebody else pays for them.

The Tytler Hypothesis

This proposition is commonly attributed to the eighteenth-century Scottish historian Alexander Fraser Tytler.

“A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. From that moment on the majority always votes for the candidate promising the most benefits, with the result that the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy.”

In a democracy, the public treasury becomes the shared resource. Voters and interest groups seek increasing benefits from it, and politicians compete to satisfy those demands upon it.

The process then becomes self-reinforcing, with political competition encouraging increasingly expensive promises until the government's financial commitments exceed its sustainable capacity to meet them.

The economic warning is that a democracy can become vulnerable when the rewards of public expenditure are increasingly concentrated among particular voters (with the ‘welfare classes’, public servants and heavily unionised professions as examples) while the costs are dispersed across present and future taxpayers.

Borrow, Borrow, Borrow.

Facing that dilemma, politicians embrace an apparently convenient solution: borrow the difference.

In their 1977 book Democracy in Deficit, economists James Buchanan and Richard Wagner clearly showed that democratic political competition creates incentives towards deficit spending.

Governments can provide popular benefits immediately while transferring part of their cost to future taxpayers, including generations not yet entitled to vote, or not yet born.

But borrowing simply postpones costs rather than eliminating them.

Persistent deficits accumulate into public debt. Interest payments absorb an increasing proportion of government revenue, requiring higher taxes, reduced services or further borrowing, as is now increasingly the case across the developed world.

In NZ these promises come primarily from the Left with a prime example in this election being the proposed incremental spend by the Green Party on some 44 different programs.

These include ACC cover expansion, free tertiary education, new rail services, increased welfare benefits, social debt write-offs, buying supermarkets, building public houses, 10% wage increases for public servants and $2 Billion plus for a Te Rangatiratanga Trust, to name just a few of the more expensive promises.

Altogether, the Taxpayers Union costs this largesse at $242 Billion over 4 years – comparing it to the incremental returns from the Greens proposed new wealth taxes, inheritance and gift taxes, increased company and high earner income taxes - estimated by the Greens themselves to be $22 Billion over the same period - with the difference coming, presumably, from increased borrowing to fill the gap.

But, if debt grows beyond the economy's capacity to sustain it, a government eventually faces a serious financial crisis.

Just as Lloyd's farmers risked destroying their shared pasture through individually rational decisions, voters and politicians may collectively undermine the financial foundations of the state by pursuing benefits whose full costs they are unwilling to bear.

This is the potential tragedy of the democratic commons. This is the proposition endorsed by a vote for the political Left, with its grandiose plans for increased public services and welfare payments funded by other people’s taxes, or borrowing, or at the last resort, printing money leading eventually to hyperinflation, when taxation, as it inevitably does, fails to deliver on the promised, offsetting revenues.

As the old proverb has it, “The road to Hell is paved with good intentions”. Perhaps we should amend this to read “The road to Hell is paved with political intentions, and unfunded voter expectations”.

John Denton, a retired Australasian Marketing Director of an American multinational, now pursues the hobby of addressing ill-informed opinions with hard facts.