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5. The country of Petrolia has two oil-fields, A and B. The Government has licensed a total of 30 firms to drill wells in the
5. The country of Petrolia has two oil-fields, A and B. The Government has licensed a total of 30 firms to drill wells in the field. 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 the two fields. The total output from fields A and B is given by QA = 39 NA - - NA and QB = 30 NB - NB where NA and NB are the number of wells in A and B respectively. (a) What will be the total output of oil, and how many wells will there be in each of the two fields, in competitive equilibrium? (b) What allocation of wells would maximize oil production? (c) Government could achieve the allocation required by (ii) by charging a flat license fee. What should the fee be and on whom should it be levied? (d) Explain briefly how this example reflects the difficulties of communal ownership
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