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Uncertainty And Irreversibility In Groundwater Resource Management

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Author Info
Tsur, Yacov
Zemel, Amos
Abstract

Optimal exploitation of renewable groundwater resources when extraction affects the probability of occurrence of an irreversible event is studied. The term irreversible signifies that the event occurrence renders the resource obsolete. It is found that uncertainty concerning the event occurrence has a profound effect. Under certainty - when the stock level below which the event occurs is known in advance - the optimal state process converges to a unique equilibrium state. Under uncertainty, when the event occurrence level is unknown, we identify equilibrium intervals and show that optimal processes initiated elsewhere converge to a boundary of one of these intervals. Inside an equilibrium interval, the expected loss due to the event occurrence is so high that it does not pay to extract in excess of recharge, even though under certainty doing so would be beneficial. These properties are illuminated by means of an example for which analytic solutions are derived.

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Paper provided by University of Minnesota, Department of Applied Economics in its series Staff Papers with number 13590.

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Date of creation: 1994
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Handle: RePEc:ags:umaesp:13590

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Keywords: Resource /Energy Economics and Policy;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Lewis, Tracy R & Schmalensee, Richard, 1977. "Nonconvexity and Optimal Exhaustion of Renewable Resources," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(3), pages 535-52, October. [Downloadable!] (restricted)
  2. Glenn C. Loury, 1977. "The Optimal Exploitation of an Unknown Reserve," Discussion Papers 255, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  3. Cropper, M. L., 1988. "A note on the extinction of renewable resources," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 64-70, March. [Downloadable!] (restricted)
  4. Tsur, Yacov & Graham-Tomasi, Theodore, 1991. "The buffer value of groundwater with stochastic surface water supplies," Journal of Environmental Economics and Management, Elsevier, vol. 21(3), pages 201-224, November. [Downloadable!] (restricted)
  5. Long, Ngo Van, 1975. "Resource extraction under the uncertainty about possible nationalization," Journal of Economic Theory, Elsevier, vol. 10(1), pages 42-53, February. [Downloadable!] (restricted)
  6. Gilbert, Richard J, 1979. "Optimal Depletion of an Uncertain Stock," Review of Economic Studies, Blackwell Publishing, vol. 46(1), pages 47-57, January. [Downloadable!] (restricted)
  7. Deshmukh, Sudhakar D & Pliska, Stanley R, 1980. "Optimal Consumption and Exploration of Nonrenewable Resources under Uncertainty," Econometrica, Econometric Society, vol. 48(1), pages 177-200, January. [Downloadable!] (restricted)
  8. Clark, Colin W, 1973. "Profit Maximization and the Extinction of Animal Species," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 950-61, July-Aug.. [Downloadable!] (restricted)
  9. Kamien, Morton I & Schwartz, Nancy L, 1978. "Optimal Exhaustible Resource Depletion with Endogenous Technical Change," Review of Economic Studies, Blackwell Publishing, vol. 45(1), pages 179-96, February. [Downloadable!] (restricted)
  10. Cropper, M. L., 1976. "Regulating activities with catastrophic environmental effects," Journal of Environmental Economics and Management, Elsevier, vol. 3(1), pages 1-15, June. [Downloadable!] (restricted)
  11. Deshmukh, Sudhakar D. & Pliska, Stanley R., 1985. "A martingale characterization of the price of a nonrenewable resource with decisions involving uncertainty," Journal of Economic Theory, Elsevier, vol. 35(2), pages 322-342, August. [Downloadable!] (restricted)
  12. Feinerman, Eli, 1988. "Groundwater management: Efficiency and equity considerations," Agricultural Economics, Blackwell, vol. 2(1), pages 1-18, June. [Downloadable!] (restricted)
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  1. Tsur, Yacov & Zemel, Amos, 1994. "Endangered Species and Natural Resource Exploitation: Extinction vs. Coexistence," Bulletins 7498, University of Minnesota, Economic Development Center. [Downloadable!]
  2. Tsur, Yacov & Zemel, Amos, 1995. "ON EVENT UNCERTAINTY AND RENEWABLE RESOURCE MANAGEMENT; Proceedings of the 4th Minnesota Padova Conference on Food, Agriculture, and the Environment, September 4-10, 1994, Wayzata, MN," Working Papers 14434, University of Minnesota, Center for International Food and Agricultural Policy. [Downloadable!]
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