STRATEGIC COST ALLOCATION

Negative externalities or ''congestion'' costs in the utilization of common resources introduce strategic considerations that tie cost allocation rules to competitiveness in external markets. The equilibrium rule for allocating common costs consists of ''profitability'' and ''strategic'' components. The ''profitability'' component dictates that the share of common costs imposed on a product should be inversely related to its relative profitability vis-a-vis other products. The ''strategic'' component dictates that the share of common costs should be modified to favor products sold in markets where strategic considerations are of relatively greater importance (i.e. oligopolistic vis-a-vis perfectly competitive markets).