Tragedy of the Commons and the Road to Serfdom

In this passage, Hayek touches upon the concept of the Tragedy of the Commons and negative externalities. He acknowledges a limitation of a pure capitalist system, yet posits that this fact is not reason enough to discard of the system outright. He then later describes that these responsibilites would fall to the state: "In no system that could be rationally defended would the state just do nothing. An effective competitive system needs an intellegently designed and continuously adusted legal framework as much as any other."

There are, undoubted fields where no legal arrangements can create the main condition on which the usefulness of the system of competition and private property depends: namely, that the owner benefits from all the useful services rendered by his property and suffers for all the damages caused to others by its use. Where, for example, it is impractical to make the enjoyment of certain services dependent on the payment of a price, competition will not produce the services; and the price system becomes similarly ineffective when the damage caused to others by certain uses of property cannot be effectively charged to the owner of that property. In all these instances there is a divergence between the items which enter into private calculation and those which affect social welfare; and, whenever this divergence becomes important some other method other than competition may have to be found to supply the services in question. Thus neither the provision of signposts on the roads nor, in most circumstances, that of the roads themselves can be paid for by every individual user. Nor can certain harmful effects of deforestation, of some methods of farming, or of smoke and noise of factories be confined to the owner of the property in question or to those who are willing to submit to the damage for an agreed compensation. In such instances, we must find some substitute for the regulation by the price mechanism. But the fact that we have to resort to the substitution of direct regulation by authority where the conditions for the proper working of competition cannot be created does not prove that we should suppress competition where it can be made to function.

Excerpt from The Road to Serfdom - Friedrich von Hayek, 1944