Commons and the Optimal Number of Firms, The

The “problem of the commons” is a frequently cited example of market failure in which exploiters’ pursuit of profits does not lead to the attainment of a social or Pareto optimum. In particular, a free-access equilibrium induces an unrestricted number of exploiters or firms to equate the variable input’s average product, instead of its marginal product, to the input’s real rental rate; hence, the rents of the variable input are driven to zero [Haveman, 1973]. When the number of firms in a commons in unrestricted, the scarce factor (e.g., the fishery, the hunting ground) is not imputed a rent. A social optimum can be achieved if a single firm exploits a commons and sells it output in a perfectly competitive market [Weitzman, 1974].