Simple Mechanisms for Managing Complex Aquifers

Stergios Athanassoglou, Glenn Sheriff, Tobias Siegfried, Woonghee Tim Huh
2009 unpublished
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
more » ... erfect 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.
doi:10.22004/ag.econ.312942 fatcat:s6yhl2qplfdypi3gkweeiqn3a4