A Free Lunch in the Commons

20 Pages Posted: 17 Sep 2009

See all articles by Matthew J. Kotchen

Matthew J. Kotchen

Yale University; National Bureau of Economic Research (NBER)

Stephen W. Salant

University of Michigan; Resources for the Future

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Date Written: August 5, 2009

Abstract

We derive conditions under which cost-increasing measures - consistent with either regulatory constraints or fully expropriated taxes - can increase the profits of all agents active within a common-pool resource. This somewhat counterintuitive result is possible regardless of whether price is exogenously fixed or endogenously determined. Consumers are made no worse off and, in the case of an endogenous price, can be made strictly better off. The results simply require that total revenue be decreasing and convex in aggregate effort, which is an entirely reasonable condition, as we demonstrate in the context of a renewable natural resource. We also show that our results are robust to heterogeneity of agents and, under certain conditions, to costless entry and exit. Finally, we generalize the analysis to show its relation to earlier work on the effects of raising costs in a model of Cournot oligopoly.

Suggested Citation

Kotchen, Matthew J. and Salant, Stephen W., A Free Lunch in the Commons (August 5, 2009). Resources for the Future Discussion Paper No. 09-30, Available at SSRN: https://ssrn.com/abstract=1473934 or http://dx.doi.org/10.2139/ssrn.1473934

Matthew J. Kotchen

Yale University ( email )

New Haven, CT 06520
United States

National Bureau of Economic Research (NBER) ( email )

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Stephen W. Salant (Contact Author)

University of Michigan ( email )

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Resources for the Future ( email )

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