Ordering Extraction from Multiple Aquifers

James Roumasset and Christopher Wada

No 2013-12, Working Papers from University of Hawaii Economic Research Organization, University of Hawaii at Manoa

Abstract: Optimal groundwater extraction satisfies the condition that the marginal benefits of water consumption equal the full marginal cost of extraction in each period, including the opportunity cost of future benefits foregone. But how should this well-known condition be generalized when there are multiple aquifers available? We provide an extension of the �Pearce equation� to guide the optimal ordering of resource extraction and an illustrative application wherein it is optimal to extract from the �leakiest� aquifer first, letting another aquifer increase in volume. This generalized least-cost-first principle contrasts strongly with the sustainable yield approach. By including spatial dimensions, the model provides the marginal valuations of water at each time and place, such that full marginal cost pricing can incentivize users to implement the efficient program. While an untrammeled water market would fail to provide the optimal solution, regulators can facilitate efficient water trading by setting appropriate exchange rates.

Pages: 18 pages
Date: 2013-11
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