We show that oil production from existing wells in Texas does not respond to price incentives. Drilling activity and costs, however, do respond strongly to prices. To explain these facts, we reformulate Hotelling's (1931) classic model of exhaustible resource extraction as a drilling problem:...

We derive conditions under which cost-increasing measures - consistent with either regulatory constraints or fully expropriated taxes - can increase the profits of all agents active within a common-pool resource. This somewhat counterintuitive result is possible regardless of whether price is...