The Tragedy of the Commons - Essay Example

Political Science Tragedy of the commons refers to an economic theory that s that people acting rationally andindependently according to their self-interests behave divergently to their best interests by depleting common resources (Schick 1998, p45). To overcome this phenomenon, governments use fiscal policies. Governments keenly employ fiscal policies, whether taxation or public spending to tackle market failures and fulfill redistributive goals. The so-called classical duties of governments –to normalize externalities and guarantee sufficient distribution of services and public goods- have a laudable foundation and are for long-term growth alongside social inclusion. Practically, though, it is not easy to ascertain whether the most favorable size of government has been achieved. Although, the provision of services and public goods can promote growth, revenue-raising mechanisms and inefficient provision of services and goods can impede growth (Schick 1998, p18). Evidence from Central Asia and Europe lists factors such as fiscal consolidation and budget deficits, size of government, quality governance, and composition of taxes and expenditure as some factors that affect fiscal growth. In this regard, public fiscal systems play a huge role in economic growth of any country. Enacting a stable fiscal position need a sustainable fiscal consolidation. In most cases, these have to be recurrent. Indeed, they are largely considered as a basic characteristic of the evolution of the market. Such consolidations are undertaken across Central Asia and Europe, albeit with relative degrees of success (Berthélemy & Varoudakis 1996, p72). Fiscal growth for any country would require successful financial adjustment. On the other hand, unsustainable financial consolidation is counterproductive and can sometimes discourage investor confidence since they fail to establish sound financial position for the government (Scartascini 2004, P37). Sustainable government adjustments are required to create long-lasting financial space for expenses that propagate growth. Indeed, evidence from financial bodies such as the Organization of Economic Co-operation and development suggest that make-up of financial adjustment is paramount for fiscal sustainability (Berthélemy & Varoudakis 1996, p12). Consolidations, which heavily rely on, tax cuts and increases in public ventures have been unsustainable while consolidations with structural reforms in their public expenditure reforms have lasting effects and financial growth by extension. Perhaps this is because they have dealt with major types of expenses showing a stronger upward drift. The same results have been confirmed in developing countries as well. The major difference has been that there is better mobilization of tax funds that support consolidation; chances of sustainability greatly increase (Ostrom 2010, P26). After surpassing the fiscal deficit, the amount of government expenses will most likely have an effect on economic growth. A higher level of public expenditure can negatively influence resource distribution and growth through a number of channels. These then directly or indirectly add rigidity to the budget and make it difficult to control or monitor fiscal balance (Berthélemy & Varoudakis 1996, p132). Consequently, they accelerate levels of taxation and occasionally reduce incentives to invest, save, innovate, and take part in the labor market. Huge government expenditures are always aided by intrusive regulations that often trigger private investment and participation. Additionally, when they become bigger, spending programs can sometimes become unfruitful, especially when they are poorly designed due to little government effectiveness or when they give rise to more opportunities for rent-seeking and corruption. Thus, the impact of government spending programs on growth can, therefore. be particularly sensitive, largely depending on the governance quality (Ostrom 2010, P26). Experimental evidence does suggest that make-up of expenditure matters a great deal for growth (Ostrom 2010, P26). Administrative expenditures that enhance quantity and efficiency production factors are deemed as productive since they directly contribute to higher growth. Likewise, expenditures that help enforce the rule of the law, safeguard property rights, and assist transactions can be viewed as productive- although different schools of thought differ regarding the reasonable government expenditure. Conversely, huge expenditure on wide-ranging public services- which can sometimes evident of reduced government efficiency and bloated bureaucracy and on security are mostly less favorable to growth and can therefore be generally considered “unproductive” (Ostrom 2010, p26). Correspondingly, significant expenditure on welfare services and transfers can create a disincentive that promote taking part in the labor force. On the other hand, subsidies can hamper resource allocation in the market force, and enhance low-productivity activities. At the moment, there is insufficient evidence regarding an impact of the mentioned effects in transition economies. Empirical evidence proposes that tax structure by various governments matters a great deal and largely influence growth (Mundial 1998, p25). Corporate and income taxes decrease the disposable return to physical or human capital and can, therefore, impair growth. High labor taxes are discouraging since they daunt formal employment, while instead promote employment in the informal sector, a sector that is usually untaxed. Of course, this would hurt the economy and rob the government of significant amounts of money that it could use to finance significant sectors of the economy. Conversely, indirect taxes homogeneously imposed on consumption such as V.A.T can have minimal adverse effects on growth, since in most cases they are neutral towards investment and saving decisions and never deform incentives to work (Schick 1998, p28). Increasing evidence from developing economies confirm that financial adjustments supported by cuts in expenditure have always been long-lasting and successful at least as compared to fiscal adjustments supported by measures intended to increase revenue. For financial success and to keep track of financial growth, there need to be proper fiscal adjustments. It is largely the duty of a government to enact policies and promote practices that will reduce unnecessary spending and encourage growth (Mundial 1998, P13). Successful financial adjustments are identified based on their effectiveness and duration in reestablishing fiscal balance as well as decreasing public debt. Poverty and non-performing economies especially in Latin America were largely caused by extreme spending of foreign savings, resulting partly from lax financial institution. To overcome this, and to escape the commons dilemma that was observed in Europe and Central Asia, countries need to come up with favorable fiscal adjustment policies (Berthélemy & Varoudakis 1996, p37). These should then be complemented with extra macroeconomic policies. For instance, hard monetary regimes should successfully coexist by neither public behavior nor incoherent fiscal policy. A fiscal adjustment is considered successful when the fiscal balance is positive after the adjustment or at least not a significant negative so that it can compromise factors for sustainable debt (Scartascini 2004, p15). Overall, it takes the collective efforts of the government and the public to protect economic resources. Referencing List Berthélemy, J. C., & Varoudakis, A. A., 1996, Do Public Finance Systems Matter for Growth? (Ch. 3). OECD Publishing. Mundial, B., 1998, Public Expenditure Management Handbook. Washington, DC, USA. Ostrom, E., 2010, beyond markets and states: polycentric governance of complex economic systems. The American economic review, 641-672. Scartascini, C., 2004, the politics of the budget process. Little Brown and Company, New York, United States. Schick, A., 1998, A contemporary approach to public expenditure management. World Bank Institute. Read More