CHAPTER 16OLIGOPOLY363Common ResourcesIn Chapter 11 we saw that people tend to overusecommon resources. One can view this problem as an example of the prisoners’dilemma.Imagine that two oil companies—Exxon and Arco—own adjacent oil fields.Under the fields is a common pool of oil worth $12 million. Drilling a well to re-cover the oil costs $1 million. If each company drills one well, each will get half ofthe oil and earn a $5 million profit ($6 million in revenue minus $1 million incosts).Because the pool of oil is a common resource, the companies will not use it ef-ficiently. Suppose that either company could drill a second well. If one companyhas two of the three wells, that company gets two-thirds of the oil, which yields aprofit of $6 million. Yet if each company drills a second well, the two companiesagain split the oil. In this case, each bears the cost of a second well, so profit is only$4 million for each company.
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