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Commons with increasing marginal costs: random priority versus average cost*
Author(s) -
Crès Hervé,
Moulin Hervé
Publication year - 2003
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.t01-1-00102
Subject(s) - marginal cost , crowding , commons , marginal value , economics , average cost , microeconomics , welfare , value (mathematics) , search cost , econometrics , computer science , statistics , mathematics , law , market economy , neuroscience , political science , biology
Indivisible units are produced with increasing marginal costs. Under average cost , each user pays average cost. Under random priority , users are randomly ordered (without bias) and successively offered to buy at the true marginal cost. Both average cost (AC) and random priority (RP) inefficiently overproduce. RP tends to overproduce less, but which game collects more surplus depends much on the demand configuration. We show that a key to compare the welfare properties of the two mechanisms is the crowding factor , i.e., the number of potential users over the number of units of output users can afford: The more crowded the commons, the more RP outperforms AC. In the quadratic cost case, beyond the threshold value of 2.4 for the crowding factor, RP strongly outperforms AC; beneath it AC only mildly outperforms RP. Thus the RP mechanism manages crowded commons better than AC.