Commons with Increasing Marginal Costs: Random Priority versus Average Cost
AbstractIndivisible 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.
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Bibliographic InfoPaper provided by Rice University, Department of Economics in its series Working Papers with number 2000-04.
Date of creation: Sep 2000
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Other versions of this item:
- HervÈ CrËs & HervÈ Moulin, 2003. "Commons with increasing marginal costs: random priority versus average cost," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(3), pages 1097-1115, 08.
- D60 - Microeconomics - - Welfare Economics - - - General
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