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Dynamic Resource Allocation with Cost Externality

Author

Listed:
  • Hao Zhao

    (Economic Science Institute, Chapman University)

  • David Porter

    (Economic Science Institute, Chapman University)

Abstract

The inter-temporal resource allocation efficiency of a property rights-based common-pool resource system is challenged by a cost externality when one user’s extraction raises the extraction cost for others. This paper builds a dynamic resource allocation model to illustrate the efficiency loss from a standard property rights market. We then create a novel inter-temporal allocation mechanism that preserves dynamic efficiency. Our dynamic resource allocation mechanism includes an optimal planning stage where the agents collectively determine a binding extraction target for each period and a market stage where agents can exchange their extraction rights assigned within each period. The theoretical model demonstrates that our mechanism can achieve the socially optimal allocation in two specific environments. A numerical simulation of our mechanism for a general environment consistently tracks the social optimum and significantly outperforms the traditional property rights market.

Suggested Citation

  • Hao Zhao & David Porter, 2021. "Dynamic Resource Allocation with Cost Externality," Working Papers 21-19, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:21-19
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    File URL: https://digitalcommons.chapman.edu/esi_working_papers/356/
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    More about this item

    Keywords

    Common-pool resource management; cost externality; dynamic efficiency; property rights market; optimal planning;
    All these keywords.

    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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