The country of Petrolia has two oil fields A and B. The government has licensed a total of 30 firms to drill wells – drilling is costless, and the firms can choose whichever field they like. Each licensed firm can drill one well only. No other firm can enter. Each well will produce exactly as much as other wells in the same field, although production could differ between two fields. The total output from fields A and B is given by

where NA and NB are the number of wells in A and B respectively.

(i) What will be the total output of oil and howmany wells will there be in each of the two fields?

(ii) What allocation of wells would maximize oil production?

(iii) Explain briefly how this example reflects the difficulty of communal ownership.

Answer rating: 100% (QA)

i To maximize total output the licensed firms will allocate their wells between the two fields until ... View the full answer