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Simple Mechanisms for Managing Complex Aquifers

Author

Listed:
  • 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.

Suggested Citation

  • Stergios Athanassoglou & Glenn Sheriff & Tobias Siegfried & Woonghee Tim Huh, 2009. "Simple Mechanisms for Managing Complex Aquifers," NCEE Working Paper Series 200905, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Oct 2009.
  • Handle: RePEc:nev:wpaper:wp200905
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    File URL: https://www.epa.gov/environmental-economics/working-paper-simple-mechanisms-managing-complex-aquifers
    File Function: First version, 2009
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    References listed on IDEAS

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    6. Athanassoglou, Stergios, 2009. "The Effect of Uncertainty on Pollution Control Policy," MPRA Paper 16898, University Library of Munich, Germany.
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    11. 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, May.
    12. 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.
    13. 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.
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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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    Keywords

    groundwater; differential games; imperfect monitoring;

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