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Simple Mechanisms for Managing Complex Aquifers

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

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.

Suggested Citation

  • Athanassoglou, Stergios & Sheriff, Glenn & Siegfried, Tobias & Huh, Woonghee Tim, 2009. "Simple Mechanisms for Managing Complex Aquifers," National Center for Environmental Economics-NCEE Working Papers 280878, United States Environmental Protection Agency (EPA).
    • Handle: RePEc:ags:nceewp:280878
    DOI: 10.22004/ag.econ.280878
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    References listed on IDEAS

    as
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