Spatial-dynamic seawater intrusion and pumping cost externalities in a confined aquifer

This paper analytically develops the economic theory of seawater intrusion in confined aquifers and, in the process, creates generally applicable solution methods for illuminating steady-state spatial externality relationships for other spatial-dynamic diffusion resource management issues. By linking a confined aquifer and its unconfined recharge region with a dynamic boundary condition neglected in the economics literature, we introduce the physical realities that generate spatial externalities in all renewable confined aquifers. We derive spatial-dynamic first-order conditions for optimal extraction and characterize the policy relevant spatial-dynamic pumping cost and seawater intrusion cost externalities with hydrological assumptions appropriate to the different dynamic timescales of system components and the focus on seawater intrusion. For confined aquifers, we prove the marginal seawater intrusion cost externality decreases linearly in distance from the coast. Moreover, we demonstrate that the marginal seawater intrusion cost externality generally exceeds marginal pumping costs near the coast, implying substantial divergence between optimal and common property extraction near the coast, and significant divergence may extend to the inland aquifer boundary depending on both the magnitude and shape of the revenue function relative to extraction costs and aquifer parameters.     

Strategic entry and externalities in groundwater resources: Evidence from the lab

This study uses economics experiments to extend the literature on common-pool resources by focusing on entry investment behavior in a stylized, spatially explicit aquifer. The model consists of a two-stage game, where participants make an entry decision in the first stage and, if they choose to enter, decide how much resource to extract in the second stage. Results show that entry behavior and groundwater pumping decisions are significantly affected by the underlying spatial externalities of the resource. In instances where the impacts of groundwater use are spread across all resource users, we observe both a greater number of users choosing to use the resource and a higher intensity of use. The results support expectations from the model that groundwater management policies should focus on entry in addition to decisions related to the volume of pumping. The results also discern the interplay of entry with both hydrogeologic characteristics of the resource and the option to exit and reveal that the option to exit increases the intensity of extraction as well as initial entry rates.     

Cooperative Management of Groundwater Resources in the Presence of Environmental Externalities

This paper investigates how cooperation among users can achieve a better management of groundwater in the presence of environmental externalities. Cooperation allows users to internalize the damages caused by their activities and reduce extractions. The paper develops a game theoretical framework to assess the value of cooperation in an aquifer that is divided into three sub-aquifers that are being overly exploited. Two types of externalities are modeled: first, water extractions in each sub-aquifer impact water levels in neighboring sub-aquifers (extraction externality). Second, the three sub-aquifers are also connected to an ecosystem and thus decisions in each sub-aquifer affect the health of the ecosystem (environmental externality). A cooperative game theory model is applied. The model empirically shows how the uncontrolled extractions in each sub-aquifer affects neighboring groundwater users but also cause severe impacts to the linked ecosystem. The model is tested empirically in one of the most important aquifers in Spain, the Eastern la Mancha aquifer. The results illustrate how both extraction and environmental externalities interact in affecting the likelihood of cooperation among the users. The paper estimates the value of cooperation and its stability with and without the environmental externality.     

Mitigating Negative Water Quality and Quality Externalities by Joint Management of Adjacent Aquifiers

Groundwater basins are usually separated into aquifers that are hydrologically interrelated. This interrelation may take the form of water movement from one aquifer to another. When differentials in water quality exist, pumping from one of the aquifers can cause water movement that may be associated with degradation of its quality. A management policy that considers this interrelation may be preferable to an independent management of each aquifer. This paper develops a dynamic optimal control model to evaluate joint versus independent management. The optimal joint pumping management, in which two adjacent aquifers of different water qualities are interrelated, is analyzed and compared to independent aquifer pumping, and the situations where joint management is not required are identified. Policy implications are then derived and discussed. Finally, the theoretical model is applied to a case of interrelated aquifers in southern Israel. The empirical model identifies conditions (interest rate, agricultural fresh water supply rainfall recharge, price of surface water, drinking water quality standards) under which a joint policy is preferable. The empirical results confirm the theoretical ones.     

Groundwater management: The effect of water flows on welfare gains

We construct a spatially explicit groundwater model that has multiple cells and finite hydraulic conductivity to estimate the gains from groundwater management and the factors driving those gains. We calibrate an 246-cell model to the parameters and geography of Kern County, California, and find that the welfare gain from management for the entire aquifer is significantly higher in the multi-cell model (27%) than in the bathtub model (13%) and that individual farmer gains can vary from 7% to 39% depending of their location and relative size of demand for water. We also find that when all farmers in the aquifer simultaneously behave strategically the aggregate gains from management are significantly smaller. However, individual farmers do not have the incentive to behave strategically even with finite hydraulic conductivity when other farmers behave myopically.     

Privatization of Water-Resource Development

This paper analyzes the inefficiencies from market power and return-flow externalities in private construction of a water project. The model pays special attention to increasing groundwater pumping costs, project set-up costs, limited project capacity, and return flow to the aquifer. For a given capacity, the return-flow externality causes project owners to construct the project too late when the price of groundwater is too high because the external benefit of return-flow to the aquifer is not captured. Market power exacerbates these effects since the project owner delays construction to accelerate groundwater overdraft. The return-flow externality and market power also decrease installed capacity and increase overdraft from the aquifer. Applying the model to the construction of the Central Arizona Project (CAP) for a given capacity, the estimated deadweight loss from hypothetical private construction of the project ($0.853 billion) is substantially less than the literature’s estimate of deadweight loss from actual construction by the Bureau of Reclamation ($2.603 billion). However, under the federal subsidies and insecure property rights that accompanied the CAP, private construction results in a larger estimated efficiency loss ($6.126 billion).     

Optimal Mechanisms for Heterogeneous Multi-Cell Aquifers

Standard economic models of groundwater management impose restrictive assumptions regarding perfect transmissivity (i.e., the aquifer behaves as a bathtub), no external effects of groundwater stocks, observability of individual extraction rates, and/or homogeneous agents. In this article, we derive regulatory mechanisms for inducing the socially optimal extraction path in Markov perfect equilibrium for aquifers in which these assumptions do not hold. In spite of the complexity of the underlying system, we identify an interesting case in which a simple linear mechanism achieves the social optimum. To illustrate potential problems that can arise by erroneously imposing simplifying assumptions, we conduct a simulation based on data from the Indian state of Andhra Pradesh.     

Groundwater and ecosystems damages: Questioning the Gisser-Sánchez effect

Gisser and Sánchez (1980a) state the conditions under which welfare gains from policy intervention are negligible in aquifer management, when compared with non-regulation or “free market” outcomes. This is the so-called Gisser-Sánchez effect (GSE), which has been supported by the ensuing literature during recent decades. The GSE requires a number of assumptions, among which is the disregard for aquatic ecosystems linked and dependent on aquifer systems. The depletion of aquifer systems in arid and semiarid regions worldwide is causing acute water scarcity and quality degradation, and leading to extensive ecosystem damages. This study shows that by including environmental damages into the analytical model, results can change substantially. The analysis highlights both theoretically and empirically the importance of policies in groundwater management, as well as the potential role for stakeholders' cooperation. The empirical application deals with two large aquifers in Spain, the Western La Mancha aquifer which is grossly mismanaged, and the Eastern La Mancha aquifer, which is moving towards sustainable management. Western and Eastern La Mancha aquifers illustrate that policies and institutions are essential to avoid the current global aquifer mismanagement.     

Joint Quantity/Quality Management of Groundwater

Economic literature on groundwater managementhas traditionally been split into two areas: there are papers that evaluate different schemes of dynamicaquifer management, considering that pumping costs vary with stock but ignoring water quality. On the other hand, there are papers that considercontamination problems caused by specificpollutants. This paper presents two alternative models for joint quantity-quality management, and it shows that existing models are in fact special cases of these. The framework isdynamic and considers both the stock of waterquantity and a stock measure of water quality. Optimal taxes are derived, and shown to be different from those in existing quantity-only or quality-only models. Implementationproblems are briefly discussed.     

Mountain-to-sea ecological-resource management: Forested watersheds,coastal aquifers,and groundwater dependent ecosystems

Improving the understanding of connections spanning from mountain to sea and integrating those connections into decision models have been increasingly recognized as key to effective coastal resource management. In this paper, we aim to improve our understanding of the relative importance of linkages between a forested watershed, a coastal groundwater aquifer, and a nearshore marine groundwater-dependent ecosystem (GDE) using a dynamic groundwater optimization framework and simple ecosystem equations. Data from the Kīholo aquifer on the Kona Coast of Hawai‘i Island are used to numerically illustrate optimal joint management strategies and test the sensitivity of those strategies to variations in physical and behavioral parameter values. We find that for a plausible range of watershed management costs, protecting part of the recharge capture area is always optimal. Without watershed protection, maintaining a safe minimum standard growth rate for a GDE-dependent marine indicator species, reduces net present value non-trivially, but optimal investment in watershed conservation offsets that potential reduction by 75 %. In general, we find that optimal watershed management and groundwater pumping are most sensitive to changes in water demand growth and parameters that describe nearshore salinity.     

Watershed externalities, shifting cropping patterns and groundwater depletion in Indian semi-arid villages: The effect of alternative water pricing policies

Frequent droughts and groundwater depletion are critical constraints to improving agricultural productivity in the semi-arid tropics. India has been promoting integrated watershed management in drought-prone areas to address these constraints. Watershed communities are being assisted to invest in groundwater re-charging facilities. While communities and the public bear such costs, individual farmers capture irrigation benefits. Groundwater is a free common property resource and land users hold de-facto use rights. This has accelerated private irrigation investments and depletion of aquifers resulting in iniquitous distribution of irrigation water. Power subsidies and negligible pumping costs aggravate the problem. These policy failures and low irrigation costs to farmers are displacing water-efficient crops in favor of water-intensive crops in water-scare areas. The paper reviews the village-level externalities that aggravate groundwater depletion and evaluates potential policy options to enhance local collective action in water management. Using 3SLS, an econometric crop-water productivity model is used to evaluate alternative water policy instruments. The results indicate that different types of water user charges can be introduced with modest consequences on profitability and farm incomes. If properly implemented and managed by the local communities, pro-poor policies could bring considerable sustainability benefits and also ensure enhanced equity in access to the resource.     

Groundwater management under heterogeneous land tenure arrangements

We develop a groundwater extraction model that considers the Marshallian inefficiency associated with sharecropping and use data from Pakistan to simulate the impact of an open access regime and of optimal management on groundwater extractions, the state of the aquifer, and annual net benefits through time. We also evaluate a price instrument as a mechanism of inducing optimal extractions. Under both open access and optimal management, we observe notable differences in groundwater extractions and the water table level between the tenure model (which considers the behavior of both owner cultivators and sharecroppers) and the baseline model (which includes the behavior of only owner cultivators). We also find a modest difference in the aggregate net benefits generated by the two models. The results offer new insights—vis-à-vis land tenure heterogeneity—into the evaluation of more effective policies for groundwater management and aquifer sustainability.     

Depletion,climate, and the incremental value of groundwater

Groundwater provides vital inputs to crop production and contributes to rural economies throughout the world. Research on the economic benefits associated with groundwater resources has typically focused on the impacts of groundwater availability on the profitability of agricultural production or on the non-market benefits associated with groundwater quality for human consumption. In this research, we use stated-preference methods to investigate the total economic value to agricultural producers of an increase in groundwater availability in the Ogallala Aquifer region. The contingent valuation method allows for estimation of values beyond agricultural profitability, including non-market values such as the ability to leave additional groundwater to future generations. We find a median willingness to pay (WTP) for an additional 100 gallons per minute of well capacity of $77 per well, and that this estimate depends strongly on current well capacity and climate conditions. For counties in hotter and drier regions of the aquifer with low well capacity, median WTP is significantly higher. These results are then used in conjunction with projections of future climate and groundwater availability to generate predicted changes in the WTP for additional groundwater across the aquifer. This research provides important feedback on how the benefits of additional groundwater availability are predicted to change as groundwater resources are diminished in a changing climate.     

Renewable resource management with stock externalities: Coastal aquifers and submarine groundwater discharge

We model coastal groundwater management and its effects on submarine groundwater discharge, nearshore marine water quality, and marine biota. Incorporating the stock externality effects on nearshore resources increases the optimal sustainable steady-state levels of both the aquifer head and the stock of a keystone native algae species. Numerical simulations are illustrated using data from the Kuki’o region on the Island of Hawaii. Two different approaches for incorporating the nearshore resource are examined. Including algae's market value in the objective function results in only slightly lower rates of groundwater extraction. When a minimum constraint is placed on the stock of the keystone species, however, greater conservation may be indicated. The constraint also results in non-monotonic paths of water extraction, head level, and marginal opportunity cost of water in the optimal solution.     

Ordering the extraction of renewable resources: The case of multiple aquifers

Optimal sequencing of resource extraction is typically studied for nonrenewable resources. We provide conditions for optimal use of multiple sources of a renewable resource and characterize the resulting extraction sequence, resource scarcity values, and (single) efficiency price path for two groundwater aquifers and an abundant alternative resource. Even with one demand, the optimal sequence depends on the differential opportunity costs of the two renewables. A numerical simulation for the South O‘ahu aquifer system, which also allows for different distribution costs, illustrates the case of using the “leakier” aquifer first and then switching to simultaneous use of both resources. The welfare gain from specialization relative to independent management is $4.7 billion.     

Invasive species management in a spatially heterogeneous world: Effects of uniform policies

The spread of invasive species (IS) is an inherently spatial process, and management of invasive species occurs over spatially heterogeneous regions, but policy constraints can restrict management responses to be homogeneous across regions. Using a spatial bioeconomic model that includes a representation of invasive species ecology based on heterogeneous environments that are linked across space and time by human and ecological pathways, we compare optimal spatially heterogeneous policy to spatially uniform policy. We explore the magnitude and pattern of the policy differences with emphasis on the influence of different types of underlying heterogeneity across locations.     

Strategic Behavior and Efficiency in the Common Property Extraction of Groundwater

Externalities that arise from privateexploitation of groundwater are analyzed by comparing socially optimal and privateextraction. Open-loop Nashequilibrium and stationary Markov feedbackequilibrium in nonlinear strategieshave been computed to characterize privateextraction. The use of thesetwo equilibrium concepts allows us todistinguish between cost andstrategic externalities as long as the open-loop solutioncaptures only the cost externality, and the feedback solution capturesboth. The results show thatstrategic behavior increases theoverexploitation of the aquifer. However, ifthe groundwater storage capacity is large, thedifference between the sociallyoptimal and private extraction is negligible.     

Property rights and groundwater management in the High Plains Aquifer

Groundwater is an important natural resource that needs to be managed dynamically. Ideally, institutions governing property rights to the groundwater of low-recharge aquifers should not discourage or disincentivize groundwater users from dynamic management. We develop an empirical model to examine whether agricultural groundwater users faced with prior appropriation property rights to groundwater in western Kansas exhibit dynamic, forward-looking behavior consistent with dynamic management. We find that although farmers are allotted a time-invariant maximum amount of groundwater that they can extract each year, they still behave in a manner consistent with dynamic management. Their groundwater extraction decisions are not significantly affected by the quantity they are authorized to extract, but are instead affected by expected future crop prices, expected future energy prices, and groundwater extraction by neighbors. Our results provide evidence that farmers manage their groundwater resource dynamically, even if their property rights do not necessarily encourage or incentivize them to do so.     

Enhanced Geospatial Validity for Meta-analysis and Environmental Benefit Transfer: An Application to Water Quality Improvements

Meta-regression models are commonly used within benefit transfer to estimate willingness to pay (WTP) for environmental quality improvements. Theory suggests that these estimates should be sensitive to geospatial factors including resource scale, market extent, and the availability of substitutes and complements. Valuation meta-regression models addressing the quantity of non-market commodities sometimes incorporate spatial variables that proxy for a subset of these effects. However, meta-analyses of WTP for environmental quality generally omit geospatial factors such as these, leading to benefit transfers that are invariant to these factors. This paper reports on a meta-regression model for water quality benefit transfer that incorporates spatially explicit factors predicted by theory to influence WTP. The metadata are drawn from stated preference studies that estimate per household WTP for water quality changes in United States water bodies, and combine primary study information with extensive geospatial data from external sources. Results find that geospatial variables are associated with significant WTP variations as predicted by theory, and that inclusion of these variables reduces transfer errors.     

Models in evolutionary economics and environmental policy: Towards an evolutionary environmental economics

In this paper we review evolutionary economic modelling in relation to environmental policy. We discuss three areas in which evolutionary economic models have a particularly high added value for environmental policy-making: the double externality problem, technological transitions and consumer demand. We explore the possibilities to apply evolutionary economic models in environmental policy assessment, including the opportunities for making policy-making endogenous to environmental innovation. We end with a critical discussion of the challenges that remain.