Free access vs private ownership as alternative systems for managing common property

Abstract

This study examines a specific class of common-pool resources whereby rivalry is not characterized by competition for the resource stock. Artesian aquifers are a typical example of such resources since the stock never depletes, even when part of the resource is extracted. We first propose a dynamic model to account for the relevant features of such aquifers such as the water pressure and well yield and characterize the corresponding dynamics. We then compare the social optimum with the private exploitation of an open-access aquifer. The comparison of these two equilibria highlights the existence of a new source of inefficiency. In the long run, this so-called pressure externality results in an additional number of wells for the same water consumption, thereby raising costs. Finally, we characterize a specific stock-dependent tax to neutralize the pressure externality.