Working Paper: NBER ID: w15086
Authors: Matthew J. Kotchen; Stephen W. Salant
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.
Keywords: common-pool resources; cost-increasing measures; Pareto improvements
JEL Codes: H23; Q2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cost-increasing measure (E64) | equilibrium profits (D53) |
| tax on effort (H29) | producer profits (D33) |
| tax on effort (H29) | consumer surplus (D46) |
| increase in marginal costs (D40) | aggregate effort (E10) |
| decrease in aggregate effort (D29) | equilibrium profits (D53) |
| costs can increase (E30) | consumer outcomes (G52) |