Tradable Permits for Common-Pool Resources: An Assessment Nives Dolšak 1 University of Washington, Bothell Abstract Scholars often attribute deterioration in common-pool resources (CPRs) to ill-defined property rights and suggest privatization and tradable permit markets as a solution to the commons problem. CPRs are heterogeneous, differing in physical characteristics and use patterns. Regulating their use requires tailored policy solutions that cohere with these characteristics. This paper examines factors that contribute to a well-performing tradable permit market. While the literature offers rich empirical analyses of individual tradable permit markets, it has not provided an analytical framework enabling comparative analysis of these markets. This paper develops and employs an analytical framework for comparing across markets. The comparative analysis of market performance suggests that markets are not successful in all environmental problems and all demand situations. Further, it shows that even some markets frequently cited as exemplary successes have been that for nonmarket-related reasons. On the other hand, this comparative analysis identifies sources of success for markets that partial analytical frameworks would have predicted to fail. KEY WORDS: environmental markets, tradable permits, common-pool resources, comparative case study Introduction Why are natural resources used by a large number of users so often poorly managed? Notable examples include declining fisheries, clear-cutting of forests, polluted water and air, and the depleted ozone layer. One of the most influential responses to this question was provided by Garrett Hardin (1968) in his article, “The Tragedy of Commons.” Hardin predicted that individual users will appro- priate resources owned by many to the point where resources are degraded, if not destroyed. He attributed this “tragedy” to resource characteristics as well as to the nature of the resource users. These resources—commons or common-pool resources (CPRs)—have two characteristics that create conditions for resource dete- rioration: rivalry and nonexcludability. Rivalry in consumption, along with the inability to prevent others from using the resource (or, rather, high costs of exclud- ability) create incentives for the users to appropriate the resource before others do. This is because even if they were to restrain their resource use, they have no assurance that others would do the same. Given the rivalrous nature of the CPR, the restrained users would face a sucker’s payoff. Because Hardin predicted that resource users will not be able to judiciously use the resource, he recommended governmental regulation or privatization as ways to manage the common resource. 2 Governments have intervened in CPR management in several ways. First, gov- ernments have appropriated the resource and managed it on behalf of all users (e.g. national parks, national forests, and state forests). Second, governments have regu- lated the use of CPRs by prescribing technologies CPR users must employ either to withdraw the resource from the pool (as in fishing) or to deposit pollution in commons (emission filters and scrubbers to clean-up exhausts). Third, governments 541 Review of Policy Research, Volume 24, Number 6 (2007) © 2007 by The Policy Studies Organization. All rights reserved.