EDWARD S. MASON 175 



The argument for the development of multiple-purpose projects in 

 river valley development is essentially an argument for capturing 

 economies or avoiding diseconomies external to the single purpose 

 that might otherwise be exploited. Government action may be neces- 

 sary because of the size of the investment or duration of the commit- 

 ment, or because certain of the advantages — the avoidance of flood 

 damage, for example — may be difficult to bring to charge through the 

 market process. 



The unregulated exploitation of oil resources under conditions of 

 multiple ownership of a pool represents a highly important case of 

 external diseconomies. Production from the wells of one owner not 

 only withdraws oil from other owners of land overlying the pool, but 

 may so reduce the gas pressure as to limit the total recovery of all 

 owners. The principal wastes of unregulated oil production are better 

 analyzed under the rubric of external economies than that of conser- 

 vation as we have defined the term. To be sure, unregulated produc- 

 tion may increase current output at the expense of more valuable 

 future output and thus involve a conservation problem, but the prin- 

 cipal wastes involve excess inputs per unit of output independently 

 of the timing of production. 



The external diseconomies of atomistic oil production are so large 

 that we may hazard the guess that, in the absence of regulation, it 

 would not take a very long time to convince producers of the profit 

 advantages to be obtained by unit operation of oil pools. In other 

 words, it is quite possible that the main wastes of independent produc- 

 tion could have been avoided, given time, without regulation so that 

 this is not a legitimate example of a "failure of the price system." 

 Furthermore, regulation, if unavoidable, could have taken the quite 

 different form of compulsory unitization of oil and gas pool opera- 

 tions. But it is obvious that existing methods of regulation are aimed 

 at something more than waste elimination, i.e., at the stabilizing and 

 raising of prices through control of output. Whether unit operation, 

 in addition to eliminating the principal wastes that take the form of 

 external diseconomies, could also serve the interests of conservation, 

 will concern us in the next section. 



Even a generalized definition of external economies, tied as it is to 

 the firm as a unit, betrays a certain arbitrariness. If production by the 



