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Optimal Groundwater Extraction under Uncertainty and a Spatial Stock Externality

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  • Nathaniel H Merrill
  • Todd Guilfoos

Abstract

We introduce a model that incorporates two important elements to estimating welfare gains from groundwater management: stochasticity and a spatial stock externality. We estimate welfare gains resulting from optimal management under uncertainty as well as a gradual stock externality that produces the dynamics of a large aquifer being slowly exhausted. This groundwater model imposes an important aspect of a depletable natural resource without the extreme assumption of complete exhaustion that is necessary in a traditional single cell (bathtub) model of groundwater extraction. Using dynamic programming, we incorporate and compare stochasticity for both an independent and identically distributed as well as a Markov chain process for annual rainfall. We find that the spatial depletion of the aquifer is significant to welfare gains for a parameterization of a section of the Ogallala Aquifer in Kansas, ranging from 2.9% to 3.01%, which is larger than those found previously over the region. Surprisingly, the inclusion of stochasticity in rainfall increases welfare gains only slightly.

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  • Nathaniel H Merrill & Todd Guilfoos, 2018. "Optimal Groundwater Extraction under Uncertainty and a Spatial Stock Externality," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(1), pages 220-238.
    • Handle: RePEc:oup:ajagec:v:100:y:2018:i:1:p:220-238.
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    File URL: http://hdl.handle.net/10.1093/ajae/aax057
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    2. Antoci, Angelo & Iannucci, Gianluca & Rocchi, Benedetto & Ticci, Elisa, 2023. "The land allocation game: Externalities and evolutionary competition," Structural Change and Economic Dynamics, Elsevier, vol. 64(C), pages 124-133.
    3. Jesus Arellano‐Gonzalez & Frances C. Moore, 2020. "Intertemporal Arbitrage of Water and Long‐Term Agricultural Investments: Drought, Groundwater Banking, and Perennial Cropping Decisions in California," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(5), pages 1368-1382, October.
    4. Stahn, Hubert & Tomini, Agnes, 2021. "Externality and common-pool resources: The case of artesian aquifers," Journal of Environmental Economics and Management, Elsevier, vol. 109(C).
    5. Lee, Juhee & Hendricks, Nathan P., 2022. "Crop Choice Decisions in Response to Soil Salinization on Irrigated Land in California," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322602, Agricultural and Applied Economics Association.
    6. Eric C. Edwards & Todd Guilfoos, 2021. "The Economics of Groundwater Governance Institutions across the Globe," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 43(4), pages 1571-1594, December.
    7. Perez-Quesada, Gabriela & Hendricks, Nathan P. & Steward, David R., 2020. "Quantifying the economic costs of High Plains Aquifer depletion," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304225, Agricultural and Applied Economics Association.
    8. Sayre, Susan Stratton & Taraz, Vis, 2019. "Groundwater depletion in India: Social losses from costly well deepening," Journal of Environmental Economics and Management, Elsevier, vol. 93(C), pages 85-100.
    9. Nasim, Sanval & Helfand, Steven & Dinar, Ariel, 2020. "Groundwater management under heterogeneous land tenure arrangements," Resource and Energy Economics, Elsevier, vol. 62(C).
    10. Reinelt, Peter, 2020. "Spatial-dynamic seawater intrusion and pumping cost externalities in a confined aquifer," Resource and Energy Economics, Elsevier, vol. 59(C).
    11. Ellen M. Bruno & Richard J. Sexton, 2020. "The Gains from Agricultural Groundwater Trade and the Potential for Market Power: Theory and Application," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(3), pages 884-910, May.
    12. Bruno, Ellen & Van Dop Sears, Molly & Hanemann, Michael, 2020. "Groundwater Quality and Crop Choice: Implications for the Cost of Seawater Intrusion," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304340, Agricultural and Applied Economics Association.
    13. Mitter, Hermine & Schmid, Erwin, 2021. "Informing groundwater policies in semi-arid agricultural production regions under stochastic climate scenario impacts," Ecological Economics, Elsevier, vol. 180(C).
    14. Lee, Juhee & Hendricks, Nathan, 2022. "Irrigation Decisions in Response to Groundwater Salinity in Kansas," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 47(3), September.

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