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Abstract
The overuse of open-access resources is a classic example of externalities. Inefficiencies arise not only from resource use by existing participants but also from their capacity investment and the entry of new firms. Standard models of externalities, however, typically abstract from firms’ entry, exit, and capital accumulation. This paper develops a model of firm dynamics in which firms interact through stock depletion and congestion. I estimate the model using firm-level panel data from the American whaling industry (1804–1909), an unregulated global commons. I then introduce a novel, tractable framework for optimal policy design by quantifying the shadow prices of externalities. Standard per-unit Pigouvian taxes substantially improve welfare but fall short of the first best: they correct stock externalities but leave congestion unpriced, leading to persistent overcapacity. Optimal regulation combines per-unit taxes with lump-sum fees to discipline entry, exit, and investment.