Estimating Potential Social Losses from Market Failure: Oil Exploration in Alberta

Daniel R. Siegel

RAND Journal of Economics, 1985, vol. 16, issue 4, 537-552

Abstract: This article presents estimates of the potential social losses caused by market failure in oil exploration in the Rainbow-Zama region of Alberta. We construct models that predict exploratory drilling for noncooperative Nash equilibrium with and without taxes, and for the social optimum. In the absence of appropriate property rights or taxes, estimated losses are of the order of 80% of potential rents. With taxes, estimated losses are of the order of 30%. We show that actual drilling resembles that predicted by the noncooperative model with taxes rather than by the optimal model. This indicates that the land tenure system in Alberta did not effectively ameliorate the market failure not eliminated by taxation.

Date: 1985
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