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The Alberta Dilemma : Optimal Sharing of a Water Resource by an Agricultural and an Oil Sector

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  • GAUDET, Gérard
  • MOREAUX, Michel
  • WITHAGEN, Cees

Abstract

The purpose of this paper is to characterize the optimal time paths of production and water usage by an agricultural and an oil sector that have to share a limited water resource. We show that for any given water stock, if the oil stock is sufficiently large, it will become optimal to have a phase during which the agricultural sector is inactive. This may mean having an initial phase during which the two sectors are active, then a phase during which the water is reserved for the oil sector and the agricultural sector is inactive, followed by a phase during which both sectors are active again. The agricultural sector will always be active in the end as the oil stock is depleted and the demand for water from the oil sector decreases. In the case where agriculture is not constrained by the given natural inflow of water once there is no more oil, we show that oil extraction will always end with a phase during which oil production follows a pure Hotelling path, with the implicit price of oil net of extraction cost growing at the rate of interest. If the natural inflow of water does constitute a constraint for agriculture, then oil production never follows a pure Hotelling path, because its full marginal cost must always reflect not only the imputed rent on the finite oil stock, but also the positive opportunity cost of water.

Suggested Citation

  • GAUDET, Gérard & MOREAUX, Michel & WITHAGEN, Cees, 2005. "The Alberta Dilemma : Optimal Sharing of a Water Resource by an Agricultural and an Oil Sector," Cahiers de recherche 23-2005, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  • Handle: RePEc:mtl:montec:23-2005
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    References listed on IDEAS

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    Cited by:

    1. Bahel, Eric & Marrouch, Walid & Gaudet, Gérard, 2013. "The economics of oil, biofuel and food commodities," Resource and Energy Economics, Elsevier, pages 599-617.
    2. Lafforgue, Gilles & Magné, Bertrand & Moreaux, Michel, 2008. "Energy substitutions, climate change and carbon sinks," Ecological Economics, Elsevier, vol. 67(4), pages 589-597, November.
    3. Bazhanov, Andrei V., 2015. "Inefficiency and sustainability," Resources Policy, Elsevier, vol. 45(C), pages 210-216.
    4. Bazhanov, Andrei, 2011. "Investment and resource policy under a modified Hotelling rule," MPRA Paper 32428, University Library of Munich, Germany.
    5. Bazhanov, Andrei, 2011. "Investment and current utility change in dynamically inefficient economies," MPRA Paper 35487, University Library of Munich, Germany.
    6. Bazhanov, Andrei, 2012. "Disregarded inefficiency may dominate sustainability policies," MPRA Paper 43621, University Library of Munich, Germany.
    7. Kuwayama, Yusuke & Olmstead, Sheila & Krupnick, Alan, 2013. "Water Resoures and Unconventional Fossil Fuel Development: Linking Physical Impacts to Social Costs," Discussion Papers dp-13-34, Resources For the Future.
    8. Andrei Bazhanov, 2012. "A Closed-Form Solution to Stollery’s Problem with Damage in Utility," Computational Economics, Springer;Society for Computational Economics, vol. 39(4), pages 365-386, April.

    More about this item

    Keywords

    nonrenewable natural resources; renewable natural resources; order of use; water resource; oil;

    JEL classification:

    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation

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