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Simple Mechanisms for Managing Complex Aquifers

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  • 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
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    References listed on IDEAS

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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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