Three essays on the economics of groundwater extraction

Abstract

The primary contribution of this thesis is to develop a series of hydroeconomic models to act as solution-oriented tools to conduct integrated groundwater management and provide fresh policy insights. Using spatially detailed economic and hydrologic data from a real-world aquifer, this thesis examines key groundwater management problems and suggests policies that might be used to control such systems. The thesis consists of three main essays focusing on issues in groundwater spatial dynamics and the design of optimal regulations. The first essay explores the importance of including well location decisions in spatially differentiated groundwater models to provide robust estimates of the gains from optimal management. Using a spatially differentiated and dynamic model of endogenous well location, this essay compares optimal and competitive extraction paths and well location decisions under alternative hypotheses as to the spatial distribution of groundwater. The second essay presents an integrated assessment of first and second-best management tools to regulate extraction from spatially heterogeneous aquifers. The trade-offs involved in each policy choice between welfare gains, redistribution effects, hydrological sustainability and implementation costs are examined. The essay also considers new approaches to groundwater management and analyses coordination between users via a generalisation of unitisation. Although decentralised profit-sharing systems have arisen organically for the exploitation of other spatially heterogeneous resources such as fisheries, no theoretical or empirical studies have formalised decentralised unitisation schemes in a modeling framework of groundwater extraction. The third essay investigates the use of multiple instruments for optimal groundwater management under the risk of occurrence of irreversible saltwater intrusion. This essay quantifies the trade-off between risk and efficiency involved in different instrument combinations implemented in an uncertain world. Using a numerical solution to a stochastic dynamic optimisation problem, the use of multiple policy instruments in aquifer management is justified in economic terms.