Water and Wood: The Economic Trap of Common Resource Goods

 

We’re starting this post by looking at two recent articles by Stefan Labbe in BIV. The first, on October 23, 2025, highlighted the extremely low rates being charged for water use by industrial users. The second, on November 19, 2025, looked at a different but economically identical issue: unsustainable forestry harvesting rates. While water extraction and forestry might seem unrelated, from an economic perspective, they are both classic examples of the Common Resource Good trap.

This is a crucial concept because the trap threatens long-term environmental sustainability for short-term economic gain. To figure out what's happening in these sectors, let's start with the basic 100-level theory.

Key Concepts: What is a Common Resource Good?

A Common Resource Good is defined by two primary characteristics that, when combined, create a predictable market failure.

The first characteristic is that the good is Non-Excludable. This means it is difficult or costly to stop people from using the good, even if they don't pay for it. For example, trying to stop a homeowner from drilling a well or someone from filling a bucket from a lake often requires costly government intervention.

The second is that the good is Rivalrous. This means consumption by one person directly reduces the amount available for others. For instance, every tree cut down is one less for someone else, and every litre of water used is a litre that cannot then be used by another actor.

The Model of Collapse Over Time

When we first discover a common resource, the total supply, N (the total population), often seems vast, far more than the quantity demanded, Q_D, in any given year.

This initial abundance, combined with the non-excludable nature of the resource, is what leads to the Tragedy of the Commons. The short-term optimal strategy for every individual actor is to continue to extract the resource today, because an individual who cuts their own consumption is still hurt by everyone else extracting the resource anyway. This unchecked behavior leads to the resource shrinking year after year until it collapses below its reproduction threshold. You can see this process illustrated in the diagram below over five periods (N à N₅).

The Price Problem

So why doesn't a price naturally appear, even as the resource becomes scarce?

Think of a large lake with houses and businesses all around it, all using the water for various reasons. The only way a price would naturally appear is if a single actor could control access and charge money. But because the lake is non-excludable, it’s virtually impossible to enforce who is taking how much water, especially if they are drilling wells or using it for large-scale agriculture.

The cost of trying to set up a toll booth or a metering system for every single user far outweighs any potential profit. Because the good is non-excludable, the price mechanism, the force that usually balances supply and demand in a market, fails entirely.

Policy Solution 1: Property Rights

One way to overcome the common resource problem is to make the good excludable by establishing property rights.

Private Property

When we talk about shifting ownership to a single entity, or privatization, it fundamentally changes the incentives. Think about historical examples like communal grazing land or traditional agricultural plots. When everyone has access, no one has an incentive to limit their extraction or manage the land long-term. However, as soon as you fence the land and assign it to a private owner, that owner suddenly has a reason to maintain the resource's longevity. If they overgraze their cows, the cost (ruined pasture, lower land value) falls entirely on them. This incentive alignment is why privatization often solves the tragedy of the commons; the private owner internalizes the full long-term cost of their actions.

However, the way we privatize the resource can be fraught with peril and create new problems. If we simply sell off common land or resource rights to the highest bidder, it can exacerbate existing wealth inequality, turning a shared public good into a private monopoly. Furthermore, the process of privatization itself can be rife with corruption, leading to politically connected actors receiving valuable resource rights for cheap, benefiting from massive private profits while society loses out on its shared asset and shared wealth.

Nationalized Property

The other option is Nationalized Property, where the government (the Crown) retains ownership. This approach helps ensure that profits from the resource are shared by all of society and avoids the risks of exacerbating inequality by auctioning off public goods. The trade-off here is that the government now has to take on the management burden, which includes setting the laws and spending money to patrol and enforce against things like poaching or illegal extraction.

Policy Solution 2: Quotas vs. Price Controls

If the resource is nationalized and managed by the government, the objective shifts to limiting the harvest H to a sustainable level. We shouldn't think of supply as the total population N, but as the sustainable flow, the amount we can harvest in a given year while keeping the population stable. We can simplify the change in a resource population with the formula:

Change in Population = (Births - Deaths) - Harvest

The goal for Sustainable Harvesting is for the change to be zero. The government can target this sustainable level Q_H using either of two main methods:

1. Quota set at Q_H: The government sets a fixed harvest limit. This is generally the most effective "set it and forget it" tool, as the corresponding market price P_H will float based on demand for a fixed, sustainable quantity. The downside is that it requires revenue to enforce the quota.
2. Price Control set at P_H: The government sets a required price per unit extracted. This is less stable because if demand suddenly surges, the quantity harvested will automatically increase, leading to an over-harvesting of the resource unless the price is immediately adjusted.

The Policy Pitfalls and Trade-Off

Even with solid economic theory, policy implementation faces severe, very human challenges. First, estimating the exact sustainable quota (Q_H​) is complex, and the industry that stands to profit from extraction has every incentive to convince the government that Q_H​ is higher (and P_H​ is lower) than it should be, a problem known as regulatory capture.

Second, governments are often pressured to prioritize short-term economic growth (more jobs, higher GDP today) over long-term sustainability. This short-sighted goal can unfortunately be pursued for generations before the resource finally collapses.

The Real Cost of Collapse

This brings us back to the unavoidable trade-off. We have seen time and again what happens when a common resource fails. A dark Canadian Heritage Moment is the collapse of the Atlantic cod fisheries in the 1990s which didn't just hurt the economy; it created ghost towns along the coast, destroyed generational fishing cultures, and led to deep poverty and significant social issues. The ecological cost is equally devastating, often wiping out entire food webs.

The painful irony of this situation is that the very workers dependent on the industry, who are often the most vocal opponents against any government-imposed caps or quotas, were the ones who suffered the most in the end.

Restricting harvesting today causes direct, immediate pain by limiting their income, which makes a sustainable cap seem like an affront to their way of life and a gross government overstep. However, this short-termism sets them up for an even larger economic hardship in the future. By resisting the smaller, necessary economic cut today, they ensure a catastrophic, total collapse tomorrow, where the 50% hardship becomes a 100% loss of their industry.

When we enjoy the excess profits and resource extraction today, we are setting ourselves up for this type of collapse and undue future hardship.

To make matters worse, the ultimate issue of fairness and inequality is that the wealthy shareholders and corporate leaders who profit the most from excessive extraction today will likely not be the ones around to experience the pain decades from now. They take the profits, and the future generations, including the children and grandchildren of the now laid-off workers, are left to pay the cleanup bill and deal with the lost resource.

This is an ever-pressing reminder of the current state of the forestry sector in BC today. The painful question is whether we accept the immediate pain of reduced harvesting today, or wait for the complete economic and ecological devastation later.

P.S. Only hours after finishing this post, I came across the attached image - a letter from two current sitting MPs criticizing the government’s forestry policy. This post perfectly illustrates the political difficulty of the common resource problem in real time.

The issue we discussed in the blog, based on reports cited in the BIV articles, is that we are likely significantly over-harvesting our forests. However, this letter criticizes the government for reducing the harvest limits (the Allowable Annual Cut, or AAC). The MPs state that thousands of jobs are at stake and urge action to address harvest delays to protect the coastal forestry sector.

This is the unavoidable trade-off in action. While the data suggests the resource can't support the current extraction rate, political pressure demands more extraction to protect short-term jobs and avoid immediate economic hardship.

This situation is precisely why we need to be educated about the reality of the issues at hand and need to advocate for our future. If you choose to be silent, the industries and political forces who are trying to change the rules of the game in their favour, choosing short-term profits over long-term social welfare, are definitely advocating for their goals.

Traffic Isn't Just Congestion, It's A Market Failure

 

   For any of the nearly one hundred thousand residents of the Westshore of the Capital Regional District who endure a morning commute into the CRD core, you are intimately familiar with the reality of a club good being provided at zero user cost. Traffic congestion is currently high, fueled partly by population growth and largely by the ongoing construction for the addition of bus-on-shoulder lanes.

    I recently discussed this scenario in one of my classes. Given the significant interest the topic generated, it seems timely to dust off this old blog and provide an economic overview of the subject for the few nerds like me out there that like this kind of stuff, but more over and especially to counter the common rhetoric that expansions of bus or bike lanes are purely ideological.

    To effectively analyze the problem, let's abstract from reality and simplify the scenario into a more manageable framework.

Establishing Capacity and the Club Good Framework

    Let's begin by looking at a single lane of traffic. Based on data from the Highway Capacity Manual, a single lane is estimated to move between 1,500 and 2,000 People Per Hour (PPH). For our analysis, we will use the midpoint: 1,750 PPH.

Note: As the proportion of large SUVs, trucks, or commercial vehicles increases, the PPH capacity would be expected to fall. We will, however, presume the 1,750 PPH average works for our purposes.

    The defining characteristics of a club good are that it is Non-Rivalrous (up to a certain capacity) and Excludable (whether it is excluded is a policy choice).

• Non-Rivalrous (up to capacity): A rival good, like a cookie, is consumed solely by one person and thus only that person gets the benefit from the consumption. A non-rivalrous good, like a swimming pool, can be used simultaneously enjoyed by many people. Up to capacity, adding one more person does not diminish the benefit for others. Once the capacity is exceeded, the good becomes congested, and adding the last person begins to reduce the benefit for everyone, at that point, it becomes rivalrous, adding an external cost onto the society of people trying to use it.

• Excludable: This refers to the ease with which access can be restricted to those who pay. Like a cookie or a swimming pool, a road is excludable. However unlike a cookie or a swimming pool, we choose not to charge for road access. But It is entirely feasible to implement road tolls and collect a user fee; the fact that we don't is purely a policy choice.

The Efficient and Inefficient Outcomes

    Given a downward-sloping demand (Marginal Benefit) curve, with a price of zero, the quantity demanded occurs where the curve intersects the horizontal axis. For our example, let's arbitrarily set this quantity demanded at 1,500 PPH.

    

    Under the assumption that we are below capacity, this is an efficient outcome. The social and private cost of an additional person traveling on the roadway is essentially zero. Therefore, the allocatively efficient price for this good (P=MSC) is, in fact, zero.

    But what happens when demand begins to exceed the road's capacity? This could be due to rising population, or simply the surge of rush hour demand.:

    This surge in demand to 2,000 PPH at a price of zero pushes us beyond the 1,750 PPH capacity. The excess 250 PPH attempting to use the road creates congestion, which adds external costs to the rest of society. These costs manifest as:

1. Increased Commute Time: (Time is money).

2. Increased Accidents: Leading to higher insurance premiums for all motorists.

    The result is that more people choose to drive than the roadway can handle, creating negative, harmful costs that are generally paid by all of us.

The Solutions: A Comparative Analysis

    While there are many potential solutions, we will evaluate four options for their economic efficiency and effectiveness in the context of our 2,000 PPH rush hour demand:

1. A market-based solution.

2. Adding another general-purpose vehicle lane.

3. Adding a dedicated bus lane.

4. Adding a dedicated bike lane.

    Of course there are many more solutions we could consider, but for brevity (this will be long enough) we will evaluate these 4 options. 

Market Based Solution

   The most economically sound, market-based solution is congestion pricing. The government imposes a variable toll system based on the Marginal External Cost (MEC). As the number of drivers exceeds capacity, incurring an external cost on society, the toll increases to explicitly charge users for the costs they impose on others. When traffic is below congestion, the toll is zero.

Benefits:

• Internalizes External Costs: It charges the users causing the problem, whose funds can then be used to pay for alternatives.

• Incentivizes Behavior Change: Users now face an economic incentive. Some will shift to non-peak travel times or alternative modes of transportation, freeing up the road for those who cannot easily transition.

The Political Hurdle: This is often the most vehemently opposed solution, even by those who champion market forces. Why? People naturally resist paying for something that was previously free (a key parallel is the carbon tax, which charges for the external cost of pollution choices). Furthermore, this solution does not necessarily eliminate congestion; it only reduces congestion while also generating funds by charging the users who had created the costs to offset the external costs that would otherwise be paid through other means (e.g., increased insurance and general taxation). 

Adding another lane

    For simplicity, let's assume the government already owns the right-of-way and can expand the roadway without acquiring extra land.

    The common expectation is that two lanes equal 3,500 PPH capacity (1,750 x 2). However, the Law of Diminishing Returns applies. The second lane will have lower capacity due to the friction created by lane changes and merging, etc. Let's suppose the additional lane adds 1,250 PPH, bringing the total capacity up to 3,000 PPH.

    Our current 2,000 PPH rush hour demand is now well below capacity. Ignoring the well-studied phenomenon of induced demand (where new capacity incentivizes people who previously avoided traffic to now drive, leading to a concurrent surge in demand), this simplistically solves the congestion problem.

The Cost:

    A conservative estimate for building and maintaining a (3.5m x 1m) section of roadway over its 25-year lifespan is approximately $2,000 per meter. To pay for this extra lane, we need to raise $2,000 per meter through general taxation.

• Taxation Implication: Since this solution does not include a toll, the funds must be raised through general taxation, taxing everyone regardless of whether they drive on this road.

  (A note on the "Gas Tax": These funds are not dedicated solely to roads, and even if they were, they are estimated to cover only about 60% of the cost, covering only the maintenance of existing roads not expansion, leaving the expansion for the general taxpayer to cover.)

• Cost per Person/Capacity:

• Total Cost per Current Capacity: $2,000 / 2,000 PPH = $1 PPH (per meter)

• Total Cost per Future Capacity: $2,000 / 3,000 PPH = $0.67 PPH (per meter)

    As increasing the capacity has benefits that accrue into the future, it makes sense for at least part of this project to be paid for through debt financing, this way the future members of society who move to the area end up contributing to this cost as their future tax dollars will go towards paying some of this debt cost. 

Adding a Bus Lane

    This is similar to the ongoing construction on the Trans-Canada Highway between the Westshore and Victoria core. We will assume it has the same paving cost per meter as a vehicle lane: $2,000.

The Capacity Difference:

    A dedicated bus lane has an estimated capacity of 6,000 - 8,000 PPH, for an average of 7,000 PPH.

• For the same cost as adding a vehicle lane, we increase the highway's total PPH capacity from 1,750 to 8,750.

• Our 2,000 PPH demand now uses only 23% of the total network capacity, providing significant excess capacity for future growth.

Impact on Congestion:

    To bring the existing vehicle lane (1,750 PPH) back down to capacity, only 250 of the 2,000 current drivers need to switch to the bus (12.5% of peak demand).

• Why does the bus lane look empty? Let's assume 500 PPH switch to the bus.

  • The driving lane drops from 114% capacity (2,000/1,750) to 86% capacity (1,500/1,750), it flows smoothly.

  • The bus lane operates at only 7% capacity (500/7,000).

    The same 500 people who accounted for 28% of the congestion in the driving lane now take up only 7% of the bus lane's capacity. This is a far more efficient and cost-effective way to move people.

• Cost per Person/Capacity (Bus Lane):

  • Total Cost per Current Capacity: $2,000 / 2,000 PPH = $1 PPH (per meter)

  • Total Cost per Future Capacity: $2000 / 8750 PPH = $0.23 PPH (per meter)

    This is approximately 34% of the cost per person/capacity versus adding an additional vehicle lane based on future capacity - again a valid comparison as again it would make the most sense to partly debt finance this so that future beneficiaries also end up bearing some of the cost.

Adding a bike lane

    The cost of adding and maintaining a bike lane is typically a fraction of a vehicle lane's cost, partly because it can often be done on an existing shoulder and a single car trip causes vastly more road damage than a single bike trip. (Estimated that you would need over 15,000 bike trips to do same damage as a single average vehicle trip)

    To maintain a conservative analysis, let's adjust the cost based on size: a typical bike lane (1.5m x 1m) is 43% the width of a vehicle lane (3.5m x 1m).

• Estimated Cost: $2,000 x 0.43 = $860 per meter of bike lane.

The Capacity Difference:

    Bike lane capacities are estimated at between 2,500 and 5,500 PPH. We will use the average: 4,000 PPH.

• Adding this lane brings the full capacity of the network up to 5,750 PPH (1,750 + 4,000).

Impact on Congestion:

    You will hear drivers say: "But I can't bike! I have to carry groceries, ferry my kids to hockey practice, or haul tools to work!"

And that is precisely the point.

    The goal is not to force you onto a bike for every trip. The goal is to provide a safe, efficient alternative for the 2,000 PPH creating the congestion. If, for instance, 500 (25%) of trips can be completed by bike for the trip: 

(I only chose 500 for an easy round number, and consistency as it was the value I picked for the same reason for the transition to bus)

• The driving lane reduces from 114% capacity to 86% capacity (it flows smoothly).

• You get to keep your car for those essential trips, like hauling kids and groceries, but you will now encounter significantly less congestion because others have chosen to use the high-capacity alternative.

    Meanwhile, once again (given the extreme efficiency of the bike lane) this bike lane will tend to look empty as those 500 people only account for 12.5% capacity (500/4,000)

Cost per Person/Capacity (Bike Lane):

• Total Cost per Current Capacity: $860 / 2,000 PPH = $0.43 PPH (per meter)

• Total Cost per Future Capacity: $860 / 5,750 PPH = $0.15 PPH (per meter)

This is the most cost-efficient option, representing only about 22% of the cost of an additional travel lane and 65% of the cost of the bus lane.

Conclusion

    The next time you hear someone claiming that building bike or bus lanes is a waste of money or "entirely ideological," consider the economic facts.

    Building additional general-purpose vehicle lanes is by far the most expensive and least efficient way to add capacity to the system, resulting in the largest requirement for taxation increases. Conversely, shifting public funds into bus and bike lanes, for a fraction of the cost, provides vastly higher capacity, which saves all taxpayers significant money in the long run. Thus, building bus and bike lanes is not an inefficient, ideological, or wasteful expenditure; it is the most cost-effective, efficient, and fiscally conservative option to increase the operational capacity of the road network.

    That being said, we must acknowledge that the Law of Diminishing Returns applies universally. Currently, we have a relative abundance of vehicle travel lanes, which is why an additional vehicle lane results in significantly reduced returns and exorbitant costs per user. As we continue to build out our Bus and Bike infrastructure, the same Law will eventually take hold, resulting in decreasing returns for future projects. However, given the vast difference in current capacity and cost per person, the investment required to reach a point where the cost per user equates across different modes (vehicle, bus, and bike) is immense, making these alternatives the clearly superior investment for the foreseeable future.

What are your thoughts on this? Feel free to comment below.

Postscript: Notes on the Assumptions made

To maintain analytical consistency and simplify our model, the following conservative assumptions were made:

• Cost Scaling: The specific base cost chosen, $2,000 per meter of vehicle lane, is ultimately inconsequential to the conclusion. This is because all alternative costs (bus and bike lanes) are calculated as a fixed proportion (a scalar) of this base figure, derived from the relative size and PPH capacity. Therefore, if the $2,000 figure is proven too high or too low, the cost and capacity ratios that drive this analysis will remain the same. The conclusion about the relative efficiency of each mode holds true regardless of the absolute starting cost.

• Land Acquisition Costs: We assumed that adding the extra vehicle lane, bus lane, or bike lane did not require the purchase of any additional land. If land acquisition were necessary for the vehicle or bus lanes, those respective costs would increase dramatically, widening the cost differential further. The bike lane, due to its small footprint, is often easier to fit within existing rights-of-way, making this assumption most realistic for that option.

• Maintenance Costs: We calculated the cost of the bike lane as 43% of the vehicle lane based solely on its comparative size. This intentionally ignores the maintenance variable. Given that it takes over 15,000 bike trips to cause the road damage equivalent to one average vehicle trip, the expected maintenance costs for the bike lane would be significantly lower than 43%. By scaling costs based only on initial build size, we maintained a conservative, and less "skewed," estimate for the alternatives.

• Alternative Modes: For brevity and focus, this analysis was limited to the most common local congestion solutions (market-based, lane expansion, bus lanes, and bike lanes). Other high-capacity options, such as light rail or sky train systems, were excluded to keep the discussion grounded in the current projects being considered in the region.