Common pool equities: An arbitrage based non-cooperative solution to the common pool resource problem (Q5953505)

The commons problem is an example of the failure of the market mechanism to provide an efficicnt allocation of resources. The market failure arises because each producer imposes external costs on the others that under competitive market conditions lead the commons in over exploitation. As the author states, several solutions have been proposed for this problem, each working well under certain circumstances, and each having known problems that are shortly discussed in the paper. Given this, the author suggests an alternative solution that is based on a new type of property right called the ``Common Pool Equity''. This equity may be presented for a share in the profits of any firm that extracts from the common pool resource. The implication of this will be that profits per share will be arbitraged, such that the return of an equity will be equalised across all the firms. Assuming that the firms' managers have the objective to maximise shareholder wealth and know ex-ante that profits must be arbitraged, they will recognise that only those decisions that raise industry profits can increase shareholder wealth. All external costs will then be internalised, the industry will operate as a multi-plant monopolist and all the distortionary incentives arising from the commons problems will be eliminated.