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Long-run groundwater reserves under uncertainty

  • Santiago J. Rubio

    (Universidad de Valencia)

  • Juan P. Castro

    (Universidad de Valencia)

In this paper the long-run effects of demand and recharge uncertainty on the socially optimal management of groundwater reserves are studied. Demand uncertainty is modeled in a dynamic framework by letting the demand function shift randomly but continuously through time according to a random shock that follows a stochastic process. Likewise, uncertainty about natural recharge is characterized by identifying that variable as a stochastic process. The results show how the effects on long-run groundwater reserves depends crucially on the properties of the demand function. Basically, the long-run groundwater reserves increase (decrease) with an increase in uncertainty if the demand function is convex (concave). These effects occur because the random changes in demand and natural recharge cause an expected increase (decrease) in price depending on the curvature of the demand function. En este artículo se estudian los efectos a largo plazo de la incertidumbre de recarga y de demanda sobre la gestión socialmente óptima de las reservas de aguas subterráneas. La incertidumbre de demanda se trata en un marco dinámico dejando que la función de demanda cambie aleatoriamente pero continuamente a lo largo del tiempo de acuerdo con un shock aleatorio que sigue un proceso estocástico. Asimismo, la incertidumbre sobre la recarga natural se caracteriza identificando esa variable con un proceso estocático. Los resultados muestran como los efectos sobre las reservas de aguas subterráneas a largo plazo dependen crucialmente de las propiedades de la función de demanda. Básicamente las reservas de aguas subterráneasa largo plazo aumentan (disminuyen) con un aumento en la incertidumbre si la función de demanda es convexa (cóncava). Estos efectos ocurren porque los cambios aleatorios en la recarga natural y en la demanda provocan un aumento (disminución) esperado en el precio dependiendo de la curvatura de la función de demanda.

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Article provided by Fundación SEPI in its journal Investigaciones Economicas.

Volume (Year): 20 (1996)
Issue (Month): 1 (January)
Pages: 71-88

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Handle: RePEc:iec:inveco:v:20:y:1996:i:1:p:71-88
Contact details of provider: Postal: Investigaciones Economicas Fundación SEPI Quintana, 2 (planta 3) 28008 Madrid Spain
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  1. Reed, William J & Clarke, Harry R, 1990. "Harvest Decisions and Asset Valuation for Biological Resources Exhibiting Size-Dependent Stochastic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 147-69, February.
  2. William C. Kolberg, 1992. "Approach Paths to the Steady State: A Performance Test of Current Period Decision Rule Solution Methods for Models of Renewable Resource Management," Land Economics, University of Wisconsin Press, vol. 68(1), pages 11-27.
  3. Knapp Keith C. & Olson Lars J., 1995. "The Economics of Conjunctive Groundwater Management with Stochastic Surface Supplies," Journal of Environmental Economics and Management, Elsevier, vol. 28(3), pages 340-356, May.
  4. Pindyck, Robert S, 1982. "Adjustment Costs, Uncertainty, and the Behavior of the Firm," American Economic Review, American Economic Association, vol. 72(3), pages 415-27, June.
  5. Provencher Bill & Burt Oscar, 1993. "The Externalities Associated with the Common Property Exploitation of Groundwater," Journal of Environmental Economics and Management, Elsevier, vol. 24(2), pages 139-158, March.
  6. Merton, Robert C, 1975. "An Asymptotic Theory of Growth under Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 42(3), pages 375-93, July.
  7. Tsur Yacov & Zemel Amos, 1995. "Uncertainty and Irreversibility in Groundwater Resource Management," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 149-161, September.
  8. Pindyck, Robert S, 1984. "Uncertainty in the Theory of Renewable Resource Markets," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 289-303, April.
  9. 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.
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