The term has its origins in the sharing of grazing land in a given community, called "the commons", in Britain. An individual farmer could increase his or her profits by using more of the commons than others. The other farmers would then follow suite, leading to the overexploitation and destruction of that land.
In its modern usage, the phrase is used as a metaphor to the above, referring to the exploitation of a common resource. In game theory it is used as an example of how, in a given situation, every individual can choose to do what is best for their own interests and still produce the worst sum result for the whole. See also: prisoner's dilemna
The most common and effective way to negotiate this problem is private ownership. Another way is heavy regulation and the imposition of sanctions on violators.
usage: When big companies pollute the air, it's just another example of the tragedy of the commons.