When is Encouraging Consumption of Common Property Second Best? Sorting, Congestion and Entry in the Commons

First-best pricing or assignment of property rights for rival and non-excludable goods is often infeasible. In a second-best setting where the social planner cannot limit total use, we show common-property resources can be over or under-consumed. This depends on whether the external benefits of reallocating users to less congested goods outweigh the additional costs imposed by new entrants. Applied to traffic congestion in Los Angeles, we find high-occupancy vehicle (HOV) lanes are under-consumed in the short run and overconsumed in the longer run. Surprisingly, encouraging HOV lane use increases expected congestion costs and decreases welfare on every route we study. ∗The authors thank Tania Barham, Harrison Fell, Craig McIntosh, Edward Morey and seminar participants at the Association of Environmental and Resource Economists summer meeting, LAMETA Montpellier, the NBER Summer Institute and Resources for the Future for helpful comments. When is Encouraging Consumption of Common Property Second Best? Sorting, Congestion and Entry in the Commons Jonathan E. Hughes and Daniel Kaffine2∗