Dynamic Resource Allocation with Cost Externality

Hao Zhao and David Porter

Working Papers from Chapman University, Economic Science Institute

Abstract: The inter-temporal resource allocation efficiency of a property rights-based common-pool resource system is challenged by a cost externality when one user’s extraction raises the extraction cost for others. This paper builds a dynamic resource allocation model to illustrate the efficiency loss from a standard property rights market. We then create a novel inter-temporal allocation mechanism that preserves dynamic efficiency. Our dynamic resource allocation mechanism includes an optimal planning stage where the agents collectively determine a binding extraction target for each period and a market stage where agents can exchange their extraction rights assigned within each period. The theoretical model demonstrates that our mechanism can achieve the socially optimal allocation in two specific environments. A numerical simulation of our mechanism for a general environment consistently tracks the social optimum and significantly outperforms the traditional property rights market.

Keywords: Common-pool resource management; cost externality; dynamic efficiency; property rights market; optimal planning (search for similar items in EconPapers)
JEL-codes: D45 D47 D62 Q58 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-env and nep-res
References: Add references at CitEc
Citations:

Downloads: (external link)
https://digitalcommons.chapman.edu/esi_working_papers/356/

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:21-19

Access Statistics for this paper

More papers in Working Papers from Chapman University, Economic Science Institute Contact information at EDIRC.
Bibliographic data for series maintained by Megan Luetje ().