So how would you take into consideration over-fishing? Having constantly increasing production would be good for a while until it is not. There would have to be some sort of artificial limit set, either by the fishermen themselves (which would be a cartel and well, frowned upon), or by another authority on the island (which in that case would be regulation).

Outside of that there would be an ever increase in fishing, until a crash in fish numbers. Though perhaps this could be the cause of the crash in the story, an absence of fish unraveled the whole economy.

Over supply happens because we don't have a reliable measurement of demand to base our production on. Demand has traditionally been extremely poorly estimated with slow, out of sync, paper-based processes. Now that information can be relayed instantaneously.

Perhaps a smart demand system which measures current and future demands for fish based on information input directly (P2P) from the end-user to the supply network, using some sort of utility model (which would factor in diminishing returns per user), could keep demand and supply in better balance.

The post I answered to assumed that only two entities existed in the island: financial actors and fishermen and explores what it means for the economy when we apply the basic assumptions of free-market : individual agents planning for short-term gains.

I worked within those bounds, I am actually a pretty strong advocate of sane regulation of free-market, partly because I agree with the GP: free-markets unchecked lead to some insane financial cons. And also to the tragedy of the commons that you explain.

It sounds like you're saying that markets should adhere to a first-year university understanding of Microeconomics 101, because that's your definition of a free market.

I'm more than happy to be corrected.

State a clear criticism then, instead of vague and smug dismissal.

Does my (indeed) simple model of free market misses something a more complex model shows?

Decreasing prices are usually the consequence of oversupply and lead to a decrease of production. That's indeed econ 101: a free market regulates production.

If you offer an insurance that proposes to shield people from such an effect, you are either lying to them or you are planning to replace this regulation by another mechanism, most likely planned production (which can actually perform better than free-market in some cases).

Banks are not in the business of managing industries. They are in the business of making profits (another simplistic yet surprisingly accurate model!), so I doubt that it would turn down possible profits in order to protect an industrial field.

Insurances conceived by a state, as a braking mechanism to dampen the results of market regulation, they can work. Insurances designed to generate financial profits and sold under the promise to shields agents from industry-wide effects? This is a clear step out of the land of useful financial tools that helps production.