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Principles of Economics- Mankiw (5th) 353

Principles of Economics- Mankiw (5th) 353 - CHAPTER 16 O L...

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CHAPTER 16 OLIGOPOLY 363 Common Resources In Chapter 11 we saw that people tend to overuse common 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 of the oil and earn a $5 million profit ($6 million in revenue minus $1 million in costs). 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 company has two of the three wells, that company gets two-thirds of the oil, which yields a profit of $6 million. Yet if each company drills a second well, the two companies again 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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