A Model of Common Property Resource

Suppose there are N fishing firms (i = 1 N) that are operating on a fishing ground (say, a Pond or a lake or a part of the Sea), which is a common property. That is all potential fishermen have free access to this ground. Fishing is an activity in which the catch is the output and fishing equipments are the variable inputs. We shall assume all that inputs are aggregated as vessels, which is perfectly divisible. If S is the size of the fishing ground and if there are X fishing vessels on the fishing ground, the total catch Y is assumed to satisfy Y H (X, S) 1

H is a production function with CRS but positive and diminishing returns to each factor. Since S is fixed in size, and because of CRS we can write (1) as
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H (X, S) = S H (X/S, 1) Now normalize S = 1, and hence (2) can be written as H (X) = F (X) By assumption, F (0) = 0, F' (X) > 0 and F" (X) < 0

Moreover, F (X) is bounded above (presumably by the size of the total stock of fish). These assumptions imply, F (X)/ X < F' (X)

d /dX (F (X)/ X) = {F' (X)/X F (X)/X2 } = 1

1/X {F' (X) F (X)/X} Since average product is a decreasing function in X, therefore, for d/dX (F (X)/ X) < 0, F (X)/ X and F (X)/X = 0
Lim X

>

F' (X)

If the ith firm owns xi vessels, given that the total number of vessels is X, it will be supposed for simplicity that the total catch of the i th firm can be written as xi F (X)/X . Therefore, the catch accruing to the firm i is not only a function of is input x i but also the number of vessels introduced by other firms. Since there are diminishing returns, the externality that others impose on one is of a detrimental in nature. So we write,
N

X N - i xj
j = 1, i j

Then, the ith firms catch of fish yi is supposed that yi xi F (X)/X = xi F (XN - i + xi)/(XN - i + xi) We now assume that the markets for both boats and the catch are perfectly competitive. Choosing catch as our numeraire good, let p be the rental value of a vessel. Firms are profit maximizing and are identical. Let firm i suppose that each of the other firms will introduce x^ vessels. It follows that i wants to choose xi with a view to maximize
_ _

xi F{(N 1)x + xi)/{(N 1)x + xi} p xi In market equilibrium we get,

F (Nx) /Nx 1/N {(F(Nx)/Nx F' (Nx)} = p

Let the number of vessels introduced in a market equilibrium is denoted by X^, then F (X^)/X^ 1/N {(F (X^)/X^ - F' (X^)} = p 4

Equation (4) is the fundamental equation of the problem of the common. Let us consider the symmetric Pareto efficient outcome for these N firms by choosing x so as to maximize the total net profit F (Nx) pNx 5

and then dividing the total profit equally to all firms. In other words, the N firms by their joint collusive action internalize the externalities. Maximizing (5) gives F' (X) = p 6

Equation (6) is the condition stating that the marginal product of a vessel is equal to the rental price and this ought to be so as a Pareto efficient condition. Let us denote the Pareto efficient number of vessels as X~. Now by subtracting F' (X^) from both sides in 4 we write,
_ _ _ _ _ _

F(X)/X 1/N {(F (X) - F' (X)} - F' (X) = p - F' (X) Or
_ _ _ _

F(X)/X [1-1/N] - F' (X) [1 1/N] = p - F' (X) Or

_ _ _ _

(1 -1/N) {F(X)/X F' (X)} = p F' (X)

_

7 8 3

Equation (7) implies that (p - F' (X)) > 0

Hence, from (6) and (8), we get X~ < X^ (or x~ < x^) It follows that in a free access equilibrium there are too many vessels and therefore too large a catch. From (4) it can be seen that for a finite number of firms, F(X^)/X^ p > 0 That is, average product exceeds the rental price of a vessel. Again from (4), F (X^)/X^ P = 1/N {(F (X^)/X^ - F' (X^)} 9

In (9), the LHS implies the average profit per vessel. Therefore, if a firm hires x^i vessels then its total net profit will be ^i = x^i {F (X^)/X^ P} = x^i 1/N {(F (X^)/X^ - F' (X^)} Or ^i = x^i 1/N . 1/ X^{(F (X^)- X^F' (X^)} Or ^i = x^i 1/N . 1/ N x^i {(F (X^)- X^F' (X^)} Or

^i = 1/N2 {(F (X^)- X^F' (X^)} > 0

10

We may thus conclude from the above analysis that contrary to what is often claimed, the problem of the common and the resulting sub optimality of the market equilibrium are not formally identical to an N person version of Prisoners dilemma game where the unique Nash equilibrium was characterized in dominant strategies on the part of each agent. In our above analysis, firms do not posses dominant strategies in their solution of equilibrium. It is interesting to note that for N = 1 in equation (4), there is no problem of the commons as the outcome is Pareto efficient as given in (6). While profit per firm is higher in a Pareto efficient outcome (x~), it is not in the firms interest to do so in the absence of a collective agreement. However, enforcement of an agreement may be costly to administer. Although there is no monopolistic element in the market for catch or boats, the outcome is non Pareto efficient due to the presence of external diseconomies. Given that the price for vessel, p, is constant, the total number of vessels in market equilibrium, X^, is simply a function of N. Writing equation (4) as G (X^, N) = p 11

It can be seen that as N , X^ to a finite limit. True that X^ is monotonically increasing in N, but it must be bounded above, since, if not, then it would violate (11). It therefore follows that F (X^)/X^ = P 12

This means that at a free access equilibrium profits are diluted to zero.