Tradable allowances may effectively be used to solve the tragedy of the commons problem.

Question

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Tradable allowances can be used to solve the tragedy of the commons problem because they allocate property rights to the common pool resource, allowing individuals or firms to trade allowances between themselves. This creates a market mechanism where those who value the resource the most will be willing to pay the most for the allowances, leading to an efficient allocation of the resource. As a result, individuals and firms will have an incentive to conserve the resource and use it in a sustainable manner.

Tradable Allowances May Effectively Be Used to Solve the Tragedy