If they drill slowly, it will cost them $5. If they drill fast it will cost $25. Let's look at the case of tied ownership: Since the ownership of the gas is tied to the surface ownership, each firm will get 50% of the gas regardless of the speed at which they extract it. This chart shows the payoffs: Firm 1, Firm 2 Firm two drills Slow Firm two drills Fast Firm one drills Slow Firm one drills Fast 45, 45 25,45 45,25 25,25 What is the efficient outcome of this situation? A V What will firm one choose to do? What will firm two choose to do? Will what happens (the equilibrium) be the efficient outcome? 0 0 0 So since first possession is simpler to apply but has an incentive to invest too much too early, what about tied ownership? Let's look at the incentive to invest early ..... will tied ownership avoid this problem? Let's say once again there was $100 worth of gas and the two companies could drill and extract it fast or slowly. If they drill slowly, it will cost them $5. If they drill fast it will cost $25. Let's look at the case of tied ownership: Since the ownership of the gas is tied to the surface ownership, each firm will get 50% of the gas regardless of the speed at which they extract it