Simple Mechanisms for Managing Complex Aquifers

Stergios Athanassoglou, Glenn Sheriff, Tobias Siegfried and Woonghee Tim Huh
Authors registered in the RePEc Author Service: Stergios Athanasoglou

No 200905, NCEE Working Paper Series from National Center for Environmental Economics, U.S. Environmental Protection Agency

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.

Keywords: groundwater; differential games; imperfect monitoring (search for similar items in EconPapers)
Pages: 32 pages
Date: 2009-10, Revised 2009-10
New Economics Papers: this item is included in nep-cmp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:nev:wpaper:wp200905

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