Consider a group of property owners whose land lies above a common pool of oil. If I drill a well on my land and pump, oil flows towards my well from the part of the pool under my neighbors' land, and similarly if they drill. So my extraction of oil imposes costs on them, and theirs on me. If each of us individually decides whether to drill and how much to pump, we will drill an inefficiently large number of wells and pump inefficiently fast. Not only does this increase extraction costs, lowering our net income, it may well decrease the total amount of oil we get, since rapid extraction may waste some of the available pressure.

One very common solution to this problem is unitization. Under unitization, which is authorized by the laws of many although not all states, some supermajority of the landlowners above a pool, say three fourths, can unitize the pool, turning it into a common resource jointly owned and controlled by all of the landowners. Control is then by voting, with the landowners sharing in the revenue--giving all of them an incentive to maximize the total profit from the field.

For a news story on the subject, see: Texas Oilmen Consider Unitization. Scott Scholten.September 27, 1998.