Increasing returns, individuality and use of the common pool

Abstract

A model of monopolistic competition is suggested to study common-pool resource use. Individuals extract an input from the pool to produce a consumption good under decreasing average costs. The equilibrium output and population sizes are obtained under two types of usage conjectures. Somewhat counter-intuitively, a cooperative equilibrium results in a larger population of harvesters but lower welfare than the noncooperative one. Some degree of population heterogeneity helps minimise the welfare gap between the two equilibria, but the size of heterogeneity may be a determinant if the resource pool becomes subsequently depleted. The model's potential for policy analysis is illustrated by considering how governance via institutional arrangements and transaction costs may be incorporated and inferred.