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Simple Mechanisms for Managing Complex Aquifers

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Author Info

  • Stergios Athanassoglou
  • Glenn Sheriff
  • Tobias Siegfried
  • Woonghee Tim Huh

Abstract

Standard economic models of groundwater management assume perfect transmissivity (i.e., the aquifer behaves as a bathtub), no external effects of groundwater stocks, and/or homogenous agents. In this article, we develop a model relaxing these assumptions. Although our model generalizes to an arbitrary number of cells, we are able to obtain key insights with a two-cell finite-horizon differential game. We find a simple linear mechanism that induces the socially optimal extraction path in Markov-perfect equilibrium. Moreover, implementation requires that the regulator need only monitor the state of the resource (e.g., depth of the aquifer), not individual extraction rates. We illustrate the mechanism with a simulation based on data from the Indian state of Andhra Pradesh. The simulation suggests that significant welfare loss may occur if the regulator disregards physical and economic complexity.

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File URL: http://yosemite.epa.gov/ee/epa/eed.nsf/WPNumber/2009-05/$File/2009-05.PDF
File Function: First version, 2009
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Bibliographic Info

Paper provided by National Center for Environmental Economics, U.S. Environmental Protection Agency in its series NCEE Working Paper Series with number 200905.

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Length: 32 pages
Date of creation: Oct 2009
Date of revision: Oct 2009
Handle: RePEc:nev:wpaper:wp200905

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Keywords: groundwater; differential games; imperfect monitoring;

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References

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  1. Reddy, V. Ratna, 2005. "Costs of resource depletion externalities: a study of groundwater overexploitation in Andhra Pradesh, India," Environment and Development Economics, Cambridge University Press, vol. 10(04), pages 533-556, August.
  2. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329, April.
  3. Athanassoglou, Stergios, 2009. "The Effect of Uncertainty on Pollution Control Policy," MPRA Paper 16898, University Library of Munich, Germany.
  4. Khalatbari, Firauzeh, 1977. "Market Imperfections and the Optimum Rate of Depletion of Natural Resources," Economica, London School of Economics and Political Science, vol. 44(176), pages 409-14, November.
  5. Segerson, Kathleen, 1988. "Uncertainty and incentives for nonpoint pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 87-98, March.
  6. Eswaran, Mukesh & Lewis, Tracy R, 1984. "Appropriability and the Extraction of a Common Property Resource," Economica, London School of Economics and Political Science, vol. 51(204), pages 393-400, November.
  7. Xepapadeas, A. P., 1992. "Environmental policy design and dynamic nonpoint-source pollution," Journal of Environmental Economics and Management, Elsevier, vol. 23(1), pages 22-39, July.
  8. Benchekroun, Hassan & van Long, Ngo, 1998. "Efficiency inducing taxation for polluting oligopolists," Journal of Public Economics, Elsevier, vol. 70(2), pages 325-342, November.
  9. Chakravorty, Ujjayant & Umetsu, Chieko, 2003. "Basinwide water management: a spatial model," Journal of Environmental Economics and Management, Elsevier, vol. 45(1), pages 1-23, January.
  10. Santiago Rubio & BegoƱa Casino, 2003. "Strategic Behavior and Efficiency in the Common Property Extraction of Groundwater," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 26(1), pages 73-87, September.
  11. Aggarwal, Rimjhim M. & Narayan, Tulika A., 2004. "Does inequality lead to greater efficiency in the use of local commons? The role of strategic investments in capacity," Journal of Environmental Economics and Management, Elsevier, vol. 47(1), pages 163-182, January.
  12. Griffin, Ronald C. & Montgomery, John M. & Rister, M. Edward, 1987. "Selecting Functional Form In Production Function Analysis," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 12(02), December.
  13. Naomi Zeitouni & Ariel Dinar, 1997. "Mitigating negative water quality and quality externalities by joint mangement of adjacent aquifers," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 9(1), pages 1-20, January.
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Cited by:
  1. Strand, Jon, 2010. "The full economic cost of groundwater extraction," Policy Research Working Paper Series 5494, The World Bank.

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