Three approaches to measuring natural resource scarcity: theory and application to groundwater

Efficient pricing of a resource incorporates both marginal cost of extraction and scarcity rents. Since groundwater resources exhibit natural supply constraints, scarcity rents must be imposed on current users. Given the difficulty of establishing clear groundwater ownership rights, scarcity value frequently goes unrecognized and is difficult to estimate. This results in inefficient pricing and misallocation of the resource. This thesis builds on three different methods to develop appropriate theoretical and empirical models relevant for indirect estimation of these shadow scarcity rents, which we consider as the initial and most challenging step towards efficient groundwater management. Empirical analyses are based on economic and hydrological data from t he island of Cyprus, representative of semi-arid regions. Chapter 2 critically assesses previous theoretical and empirical attempts to derive the increase in social benefits from efficient pricing of groundwater and examines the potential for groundwater management. This potential is seriously challenged by Gisser-Sanchez's Effect (GSI): i.e. net benefits from optimally managing groundwater are insignificant for all practical purposes. Chapter 3 attempts a reexamination of GSI by developing a dynamic model of adaptation to increasing groundwater scarcity, when backstop technology is available. Both groundwater scarcity rents and management benefits are derived by simulating the optimal and competitive-commonality solutions. Results point to the absence of GSI in aquifers facing complete exhaustion in the near future. Chapter 4 proposes a refinement of revealed preference methods of valuation, by combining the hedonic and travel cost methods, and applies the refined model to derive the willingness to pay for groundwater quality. It is claimed t hat hedonic valuation of quality attributes can be misleading when the exogeneity assumption, with respect to these attributes, to sample selection is violated. Hence, the simultaneity between hedonic valuation and sample selection is modelled in the context of producer behaviour and investigated empirically in the case of land demanded for use as an input either in agricultural production or touristic development. The empirical analysis suggests that failing to correct for sample selection results in a biased valuation of groundwater quality. In chapter 5 duality theory is employed to develop the distance function methodology of deriving shadow groundwater scarcity rents. The empirical application of the model involves estimating a stochastic input distance function from which the in situ shadow price of groundwater is derived. Chapter 6 concludes the thesis by comparing and contrasting the magnitude of groundwater scarcity rents and willingness to pay for scarce groundwater quality, derived from the models put forward in this research.