THE EFFECT OF MONOPSONY POWER ON PRORATIONING AND UNITIZATION REGULATION OF THE COMMON POOL

Abstract

AbstractFor four decades beginning in the 1930s, the U.S. oil and gas industry was regulated by a quota‐supported price‐floor instrument known as prorationing. Most economists argue that unitization would have been a more efficient form of regulation. This paper studies how monopsony power held by integrated pipeline/refinery firms affects that conclusion. Absent regulation, the underproduction by monopsony dominates the overproduction from common‐property supply. Thus, unitization, which forces producers to internalize costs, causes output to be further restricted. In contrast, prorationing severs the price‐setting ability of the monopsonist, so can increase output to the first‐best. Under prorationing, at the first‐best output level, the marginal monopsony rents equal the Pigouvian output tax that solves the common‐property problem. Also discussed are the distribution of gains under prorationing and unitization as implemented.