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Optimal Mechanisms for Heterogeneous Multi-cell Aquifers

  • Stergios Athanassoglou

    (Fondazione Eni Enrico Mattei and Euro-Mediterranean Center on Climate Change)

  • Glenn Sheriff

    (National Center for Environmental Economics U.S. Environmental Protection Agency)

  • Tobias Siegfried

    (Water Center of the Earth Institute, Columbia University)

  • Woonghee Tim Huh

    (Sauder School of Business, University of British Columbia)

Standard economic models of groundwater management impose restrictive assumptions regarding perfect transmissivity (i.e., the aquifer behaves as a bathtub), no external effects of groundwater stocks, observability of individual extraction rates, and/or homogenous agents. In this article, we derive regulatory mechanisms for inducing the socially optimal extraction path in Markov perfect equilibrium for aquifers in which these assumptions do not hold. In spite of the complexity of the underlying system, we identify an interesting case in which a simple linear mechanism achieves the social optimum. To illustrate potential problems that can arise by erroneously imposing simplifying assumptions, we conduct a simulation based on data from the Indian state of Andhra Pradesh.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2011.28.

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Date of creation: Mar 2011
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Handle: RePEc:fem:femwpa:2011.28
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  1. 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.
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  14. repec:cup:cbooks:9780521637329 is not listed on IDEAS
  15. Brozovic, Nicholas & Sunding, David L. & Zilberman, David, 2010. "On the spatial nature of the groundwater pumping externality," Resource and Energy Economics, Elsevier, vol. 32(2), pages 154-164, April.
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