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.