Groundwater management: Waiting for a drought*
Eirik S. Amundsen
Department of Economics, University of Bergen, Norway
Department of Food and Resource Economics, University of Copenhagen, Denmark
Search for more papers by this authorCorresponding Author
Frank Jensen
Department of Food and Resource Economics, University of Copenhagen, Denmark
Correspondence Frank Jensen, Department of Food and Resource Economics, University of Copenhagen, Denmark. Email: fje@ifro.ku.dk
Search for more papers by this authorEirik S. Amundsen
Department of Economics, University of Bergen, Norway
Department of Food and Resource Economics, University of Copenhagen, Denmark
Search for more papers by this authorCorresponding Author
Frank Jensen
Department of Food and Resource Economics, University of Copenhagen, Denmark
Correspondence Frank Jensen, Department of Food and Resource Economics, University of Copenhagen, Denmark. Email: fje@ifro.ku.dk
Search for more papers by this author*We thank Professor Lars Gårn Hansen and the participants in the EAERE conference in Zurich in 2016, in particular, Professor Ariel Dinar, for valuable comments on earlier drafts of this article. The usual disclaimer applies.
Abstract
In this article we present a stylized model for optimal management of an unconfined groundwater resource when the threat of drought exists. The drought is modeled as a stochastic event that hits at an uncertain date and two benchmark management policies are investigated: (a) A policy of optimal dynamic management ignoring the threat of drought; and (b) an economically optimal policy that accounts for the threat of a drought. We show that the optimal predrought steady-state equilibrium stock size of groundwater under policy b is larger than that under policy (a) Furthermore, we show that an increase in the probability of a drought gives rise to two counteracting effects: One in the direction of a larger predrought steady-state equilibrium stock size (a recovery effect) and one in the direction of a lower predrought steady-state equilibrium stock (an extinction effect). We find that the recovery effect dominates the extinction effect.
Recommendations for Resource Managers:
We analyze two groundwater extraction policies that can be used when a threat of drought exists: (a) Dynamic optimal management ignoring the threat of drought; and (b) dynamic optimal management taking the threat of drought into account. We show that the predrought steady-state equilibrium stock size of water should be larger under the policy (b) than under policy (a). This conclusion has three implications for resource managers:
-
Current groundwater management should take future extraction possibilities into account.
-
A resource manager ought to take the threat of drought into account in groundwater management.
-
A buffer stock of water should be built-up before the drought to be drawn upon during the event.
REFERENCES
- Amundsen, E. S., & Bjorndal, T. (1999). Optimal exploitation of a biomass confronted with the threat of collapse. Land Economics, 75, 185–202.
- Barlow, R.E. and Proschan, F. (1975): Statistical theory of reliability and life testing: Probability models, Rinehart and Winston, New York.
- Berck, P., & Lipow, J. (1994). Real and ideal water rights: The prospects for water-rights reform in Israel, Gaza, and the West Bank. Resource and Energy Economics, 16, 287–301.
- Brewer, J., Glennon, R., Kerr, A. and Libecap, G.P. (2007): Water markets in the West: Prices, trading and contractual forms, National Bureau of Economic Research, Working Paper no. 41.
- Brozovic, N., Sunding, D.L. and Zilberman, D. (2004): Measuring the gains from management of spatially heterogeneous resources: The case of groundwater, Paper Presented at the American Agricultural Economics Associations Annual Meeting, Denver, Colorado, August 1-4.
- Burt, O. R. (1964). The economics of conjunctive use of ground and surface water. Hilgardia, 35, 31–111.
10.3733/hilg.v36n02p031 Google Scholar
- Carrol, C.D. and Kimball, M.S. (2007): Precautionary savings and precautionary wealth, Manuscript, University of Michigan.
- Clark, C. W. (1990). Mathematical Bio-Economics. The optimal management of renewable resources. New York: John Wiley and Sons.
- Clark, C. W., & Munro, G. R. (1975). The economics of fishing and modern capital theory: A simplified approach. Journal of Environmental Economics and Management, 2, 92–106.
- Conrad, J., & Clark, C. W. (1987). Natural resource economics. Notes and problems. Cambridge: Cambridge University Press.
10.1017/CBO9781139173575 Google Scholar
- Dasgupta, P., & Heal, G. (1974). The optimal depletion of exhaustible resources. The Review of Economic Studies, Symposium, 41, 3–28.
10.2307/2296369 Google Scholar
- Feldman, S. L. (1975). Peak load pricing through demand metering. Journal of the American Water Works Association, September, 67, 490–494.
- Foster, T., Brozović, N., & Butler, A. P. (2014). Modeling irrigation behavior in groundwater systems. Water Resources Research, 50, 6370–6389.
- Freire-González, J., Decker, C., & Hall, J. W. (2017). The economic impacts of droughts: A framework for analysis. Ecological Economics, 132, 196–204.
- Gisser, M., & Sánchez, D. A. (1980). Competition versus optimal control in groundwater pumping. Water Resource Research, 16, 638–642.
- Hanah, E. and Stryjaski, E. (2012): California water markets by numbers: Update 2012, Public Policy Institute of California, Working Paper.
- Hanke, S., & Davis, R. (1973). Demand management through responsive pricing. Journal of the American Water Works Association, September, 555–560.
- Hanke, S. H., & Davis, R. K. (1971). Potential for marginal cost pricing in water resource management. Water Resources Research, 9, 808–825.
- Homans, F. R., & Wilen, J. E. (1997). A model of regulated open access resource use. Journal of Environmental Economics and Management, 32, 1–21.
- Kamien, M. I., & Schwartz, N. L. (1991). Dynamic optimization. The calculus of variations and optimal control in economics and management. In W. A. Brock, D. M. Jorgensen, A. P. Kirman, J. J. Laffont, & J. E. Richard (Eds.), Advanced Textbooks in Economics. Amsterdam: Elsevier.
- Kaniewski, D., Van campo, E., & Weiss, H. (2012). Droughts is a recurring challenge in the middle east. Proceedings of the National Academy of Science of the United States of America, 109, 3862–3867.
- Kiem, A. S. (2013). Drought and water policy in Australia: Challenges for the future illustrated by the issues associated with water trading and climate change adaptation in the Murray-Darling basin. Global Environmental Change, 23, 1615–1625.
- Kimball, M.S. and Weil, P. (2004): Precautionary savings and consumption smoothing across time and possibilities, Manuscript, University of Michigan.
- Knapp, K. C., & Olson, L. J. (1995). The economics of conjunctive groundwater management with stochastic surface supply. Journal of Environmental Economics and Management, 28, 340–356.
- Knapp, K. C., & Olson, L. J. (1996). Dynamic resource management: Intertemporal substitution and risk aversion. American Journal of Agricultural Economics, 78, 1004–1017.
- Kneese, A. V. (2013). The economics of regional water quality management. New York: John Hopkins Press
10.4324/9781315064710 Google Scholar
- Koila, M., Yonli, H. F., Soro, D. D., Dara, A. E., & Vouslamoz, D. M. (2018). Groundwater storage change estimation using combination of hydro-geophysical and groundwater depth fluctuation methods in hard rock aquifers. Resource, 7, 1–15.
- Koundouri, P. (2004). Current issues in the economics of groundwater resource management. Journal of Economic Surveys, 18, 1–39.
- Koundouri, P., Roseta-Palma, C., & Englezos, N. (2017). Out of sight, not out of mind: Developments in economic models of groundwater management. International Review of Environmental and Resource Economics, 11, 55–96.
- Krishnamurthy, C.K.B. (2013): Optimal management of groundwater under uncertainty: A unified approach, SSRN Working Paper.
- Leland, H. E. (1968). Savings and uncertainty: The precautionary demand for savings. Quarterly Journal of Economics, 82, 465–473.
- Mann, P. C., & Schlenger, D. L. (1982). Marginal cost and seasonal pricing of water service. Journal of the American Water Works Association, 74, 6–11.
- Margolis, M., & Nævdal, E. (2008). Safe minimum standards in dynamic resource problems: Conditions for living on the edge of risk. Environmental and Resource Economics, 40, 410–423.
- Merrill, N. H., & Guilfoos, T. (2017). Optimal groundwater extraction under uncertainty and a spatial stock externality. American Journal of Agricultural Economics, 100, 220–238.
- Nævdal, E. (2006). Dynamic optimization in the presence of threshold effects when the location of the threshold is uncertain – with an application to a possible disintegration of the Western Antarctic ice sheet. Journal of Economic Dynamics and Control, 30, 1131–1158.
- Neher, P. (1990). Natural resource economics: conservation and exploitation. Cambridge: Cambridge University Press.
- Pandey, S., Bhardari, H., & Hardy, B. (2007). Economic costs of drought and rice farmers coping mechanism. Manila: IRRT.
- Pfeiffer, L., & Lin, C. Y. C. (2012). Groundwater pumping and spatial externalities in agriculture. Journal of Environmental Economics and Management, 64, 16–30.
- Polasky, S., De Zeeuw, A., & Wagener, F. (2011). Optimal management with potential regime shifts. Journal of Environmental Economics and Management, 62, 180–190.
- Poudel, B. N., & Paudel, K. P. (2018). An integrated approach to analyzing risk in bioeconomic models. Natural Resource Modeling.
- Provencher, B., & Burt, O. (1993). The externalities associated with the common property exploitations of groundwater. Journal of Environmental Economics and Management, 24, 139–158.
- Reed, W. J. (1984). The effects of the risk of fire on the optimal rotation of a forest. Journal of Environmental Economics and Management, 11, 180–190.
- Reynaud, A. (2010): Doing better with less: Implementing peak-load pricing for residual water demand, INRA Working Paper no. 42.
- Roseta-Palma, C., & Xepapadeas, A. (2004). Robust control in water management. Journal of Risk and Uncertainty, 29, 21–24.
- Rubio, S. J., & Casino, B. (2001). Competitive versus efficient extraction of a common property resource: The groundwater case. Journal of Economic Dynamics and Control, 25, 1117–11137.
- Sears, L., Lim, D. and Lawell, C.L. (2017): Interjurisdictional spatial externalities in groundwater management, Working Paper, University of Davis.
- Sethi, G., Costello, C., Fisher, A., Hanemann, M., & Karp, L. (2005). Fishery management under multiple uncertainty. Journal of Environmental Economics and Management, 50, 300–318.
- Sibley, D. S. (1975). Permanent and transitory effects of optimal consumption with wage income uncertainty. Journal of Economic Theory, 28, 68–82.
- Sutinen, J.G. (1981): Optimal extraction of a renewable resource under uncertainty: The case of stock collapse in the fishery, Department of Resource Economics, College of Resource Development, Staff Paper Series, University of Rhode Island, Kingston, Rhode Island.
- Sydsaeter, K., Hammond, P., Seierstad, A., & Strøm, A. (2005). Further mathematics for economic analysis. London: Prentice Hall.
- Tsur, Y., & Graham-Tomasi, T. (1991). The buffer value of groundwater with stochastic water supplies. Journal of Environmental Economics and Management, 21, 201–224.
- Tsur, Y., & Zemel, A. (1995). Uncertainty and irreversibility in groundwater resource management. Journal of Environmental Economics and Management, 9, 149–161.
- Tsur, Y., & Zemel, A. (2004). Endangered aquifers: Groundwater management under threats of catastrophic events. Water Resource Research, 40, 109–113.
- van Lanen, H. A. J., & Peters, E. (2000). Definition, effects and assessment of groundwater droughts. In J. V. Vogt & F. Somma (Eds.), Droughts and drought mitigation in Europe. Advanced in Natural and Technological Hazards Research. Doddrecht: Springer.
10.1007/978-94-015-9472-1_4 Google Scholar
- Yaari, M. E. (1965). Uncertain lifetime, life insurance and the theory of the consumer. Review of Economic Studies, 32, 137–150.
- Yang, A. L., Huang, G. H., & Qin, X. S. (2010). An integrated simulation-assessment approach to evaluating health risks of groundwater contamination under multiple uncertainties. Water Resource Management, 24, 3349–3369.
- Zarnikau, J. (1994). Spot market pricing of water resources and efficient means of rationing water during scarcity (water pricing). Resource and Energy Economics, 16, 189–210.
- Zekri, S., Triki, C., Al-Maktoumi, A., & Bazargan-Lari, M. R. (2015). An optimization-simulation approach for groundwater abstraction under recharge uncertainty. Water Resource Management, 29, 3681–3695.
- Zeng, X. T., Huang, G. H., Chen, H.-L. -, Li, Y. P., Kong, X. M., & Fan, Y. R. (2016). A simulation-based water-environmental management model for regional sustainability in compound wetland ecosystems under multiple uncertainties. Ecological Modelling, 334, 60–77.
- Zilberman, D., & Lipper, D. (1999). The economics of water use. In D. den Bergh (Ed.), Handbook of environmental and resource economics. Cheltenham: Edward-Elgar.
10.4337/9781843768586.00020 Google Scholar
- Zilberman, D., & Schoengold, K. (2005). The use of pricing and markets for water allocation. Canadian Water Resources Journal, 30, 47–54.
10.4296/cwrj300147 Google Scholar