The Optimal Number of Firms in the Commons: A Dynamic Approach

Charles Mason and Stephen Polasky

Canadian Journal of Economics, 1997, vol. 30, issue 4, 1143-60

Abstract: The authors consider a common-property resource sold in imperfectly competitive markets. There is a dynamic externality (current harvests lower future stocks, raising future harvest costs) and a static (crowding) externality. Increasing industry size raises costs but lowers prices; thus, it has ambiguous welfare effects. The optimal industry size typically changes over time, so that a first-best outcome cannot be obtained with a fixed number of firms. Single-firm exploitation is optimal only under special circumstances. The socially optimal open loop steady-state industry size corresponds to the static optimum; both generally differ from the closed-loop steady-state optimum.

Date: 1997
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