THE OPTIMAL NUMBER OF FIRMS IN THE COMMONS - A DYNAMIC APPROACH

We consider a common-property resource sold in imperfectly competitive markets. There is a dynamic externality (current harvests lower futur e stocks, raising future harvest costs) and a static (crowding) extern ality. Increasing industry size raises costs but lowers prices; thus, it has ambiguous welfare effects. The optimal industry size typically changes over time, so that a first-best outcome cannot be obtained wit h a fixed number of firms. Single-firm exploitation is optimal only un der special circumstances. The socially optimal open-loop steady-state industry size corresponds to the static optimum; both generally diffe r from the closed-loop steady-state optimum.