What causes market failure in the case of common resources?

Market failure in the case of common resources is primarily caused by overuse and depletion, due to the lack of property rights.

In more detail, common resources refer to goods that are non-excludable but rival in consumption. This means that no one can be prevented from using them, but their use by one party reduces their availability to others. Examples of common resources include fisheries, forests, and the atmosphere. The lack of property rights means that these resources are available to all, but owned by no one. This often leads to what is known as the 'Tragedy of the Commons', a situation where individuals, acting independently and rationally according to their own self-interest, behave contrary to the common good of all users by depleting the shared resource.

The problem arises because each individual user does not bear the full cost of their actions. When a fisherman catches a fish, for example, he gains the full benefit of the fish but does not bear the full cost of depleting the fish stock. This is because the cost is shared among all users of the resource. As a result, each user has an incentive to use the resource as much as possible before it is depleted by others. This leads to overuse and depletion of the resource, causing market failure.

In addition, the lack of property rights can also lead to underinvestment in the maintenance and preservation of the resource. Since no one owns the resource, no one has an incentive to invest in its upkeep. This can lead to further depletion and degradation of the resource.

Furthermore, the problem of common resources is often exacerbated by information asymmetry. Users may not be fully aware of the impact of their actions on the resource, or they may underestimate the rate at which the resource is being depleted. This lack of information can lead to even greater overuse and depletion.

In conclusion, market failure in the case of common resources is caused by a combination of factors, including the lack of property rights, the resulting overuse and depletion of the resource, underinvestment in its maintenance, and information asymmetry. These factors create a situation where the market, left to its own devices, fails to allocate resources efficiently or sustainably.