Circuit Assistencial de la UHAD Germans Trias

2.7.1 Summarizing Possible Rationalizations of GSE:

Indeed, the sensitivity of the GSE to the demand function is the central result of this chapter. As established in section 2.3.2 the GSE e¤ectively states that if the slope of the demand equation is small relative to the storage of the aquifer, then the di¤erence between the socially optimal and the private exploitation of the aquifer, represented by the myopic competitive-commonality equilibrium, is insigni…cant for all practical purposes. Even before the identi…cation of the GSE, a well-established view that Kelso (1967) has characterized as the “the water-is-di¤erent syndrome” maintains that the derived demand for irrigation water is price inelastic (the price elasticity of demand is de…ned as the percentage change in quantity demanded resulting from 1% change in price, that is n= Q_P P_Q , where(P) is price and

(Q) is quantity) and thus changes in prices will redistribute income to or from farmers but not alter signi…cantly water usage in agriculture. Thus the accuracy of estimates of price elastici- ties of demand for irrigation water is extremely important in predicting producer reactions to future changes in relative water prices and inferring whether managing groundwater will have a signi…cant positive e¤ect on total welfare.

However, a signi…cant problem exists in empirically testing this hypothesis. The absence of observations over a wide range of prices has necessitated the use of programming approaches to estimate the elasticities of the derived demand for water. Linear programming studies byMoore

and Hedges (1963), Gisser and Mercado (1972), Heady et al. (1973) and Hedges (1977), have

tended to support the contentions that the demand for irrigation water is inelastic. However,

Shumway (1973), also using linear programming found that the demand for irrigation water was

elastic in the price range of $9-16 per acre-foot in 1965 relative prices. On the whole, however the indication from previous research into the impacts of water demand generally shows a relatively inelastic demand relationship though admittedly the evidence is not conclusive.

Another related point worth making, is that groundwater demand for irrigation purposes is not the only relevant one. Aquifers have historically been a clean source of water for domestic, industrial and commercial purposes as well. Studies of the demand for water carried out in

the past for di¤erent parts of the world and at di¤erent times, show that the price elasticity of various classes of water demand as well as total water demand, is signi…cantly di¤erent from zero. These studies have invariably attempted to regress demand for water against such variables as price, income, wealth, climate, etc. A summary of the …ndings of a number of these studies is provided byHerrington (1987), where it is argued that price elasticity of demand for water lies somewhere in the range of(0:0)to( 0:3), again indicating inelastic demand schedules. Hence one could conclude that the shape of real world demand curves for this resource, is probably one of the main causes of the GSE:

Moreover, in section 2.2.4 of this chapter we argued that when the lateral groundwater movement is slow, externality e¤ects are insigni…cant and private decisions of …rms maximize social welfare. However, slow lateral water movement is a characteristic of homogeneous aquifers only and not a general aquifer characteristic. Furthermore, in section 2.5.1 we indicated that the steady-state groundwater stock in an uncontrolled game theoretic environment is higher than the steady-state groundwater stock in an uncontrolled competitive environment. This result suggests that if real world groundwater extraction is strategic, then management bene…ts will be even smaller than bene…ts from managing competitive, non-strategic extraction. Finally, as argued in section 2.6.2, the bu¤er value of groundwater in a stochastic framework is not always positive, a result one cannot guarantee the increase in management bene…ts when the stochastic nature of surface water supplies, that are used conjunctively with groundwater, is acknowledged.

However, this is not to say that there exist no need for groundwater management. On the contrary, in this chapter we have identi…ed a number of circumstances that have or may poten- tially render groundwater management signi…cantly welfare increasing. Firstly, Worthington

et al. (1985) have pointed out in an empirical work, that the di¤erence between the optimal

control and competitive regimes may not be trivial in con…ned aquifers if the relationship be- tween the average extraction cost and the water table level is not linear and there are signi…cant di¤erences in land productivity (see section 2.3.3). This result points to the need to develop more empirical work to derive a good approximation of the shape of marginal cost of extraction curve, and more theoretical work to resolve an asymmetric groundwater pumping di¤erential

game where the di¤erences in land productivity are taken into account. Secondly, Brill and

Burness (1994) derive the same empirical result with non-stationary groundwater demand (see

section 2.4.1), which points to the importance of allowing time-varying economic parameters in in…nite horizon optimal control models.

Thirdly, in section 2.4.2 we argue that driving interest rates down, in the light of suspected irreversibilities and uncertainty about future water demand and supply, would raise groundwa- ter management bene…ts. Moreover, in section 2.5.1 we argue that incorporation of uncertainty, irreversibility and learning in a groundwater extraction game may increase the ine¢ciency of uncontrolled water pumping and further increase management bene…ts. Fourthly, in section 2.4.3 we argue that there might exist additional components of value in groundwater preserva- tion, over and above “direct use values” that are considered in the literature under investigation. Taking account of “indirect use”, “quasi-option” and “existence values” of groundwater, could increase the bene…ts from management if the sum of these values is signi…cant. Fifthly, in section 2.6.1 we argue that in tributary aquifers it is possible that additional negative externalities are involved in groundwater extraction, over and above the three groundwater stock externalities identi…ed in section 2.2.1, such as presence of the so called “river e¤ects”. Correcting for these externalities as well as the stock externalities, could potentially increase management bene…ts and reduce the relevance of the GSE: Finally, in section 2.6.2 we argue that already existing stochastic di¤erential games and optimal control models in the groundwater literature, assume risk neutrality and are not able to estimate possible management bene…ts from reduction in the variability of returns that could arise in a risk averse environment.

2.7.2 Motivation of Consecutive Research.

The GSE in essence states that in certain circumstances there may be a negligible nu- merical di¤erence between competitive and socially optimal rates of water pumping from an underground aquifer; i.e. the numerical magnitude of the various pumping cost and common property externalities is insigni…cant. This result implies that marginal cost pricing of the re- source is approximately e¢cient and that thein situ scarcity value of the resource is negligible. Clearly, if this result extends to a general rule then the role and scope of water management pol-

icy are severely limited. That is, a corollary of theGSE is that the potential bene…ts associated with the regulation of the resource are relatively small, so that from an economic point of view (i.e. using cost-bene…t analysis), regulation of the resource could not be advised. However, the evolution of economic thought indicates that such simpli…ed models as the one introduced by

Gisser and Sanchez (1980 a, b) often lead to strong theorems and clear-cut results; the danger

is that abstraction from reality may often bias results in directions inconsistent with real world behaviour.

This result motivated consecutive research in this thesis. More speci…cally, the research in chapters 3 and 5, builds on two di¤erent economic methodologies to develop appropriate theoretical and empirical models relevant for measuring the scarcity value of in situ ground- water; these measures are used in the derivation of inferences on the potential of managing this resource. As already argued, if social groundwater scarcity rents are signi…cant but not incurred by current resource users, then groundwater extraction is dynamically ine¢cient and some form of management is needed (not necessarily price management). If the scarcity rents of the resource are insigni…cant then marginal cost pricing of groundwater extraction is approx- imately optimal, and groundwater management is not needed. Moreover, chapter 4 combines and builds on two existing economic literatures in order to provide a methodology for deriving an accurate measure of willingness to pay for improved groundwater quality, which arises from the scarcity of this attribute of groundwater and its role in enchancing individuals’ well-being. Once again, inferences on the appropriate management of the resource under consideration are derived.

Consecutive models are deterministic because, as argued in section 1.3, empirical research is based on data from a semi-arid region where natural recharge of the resource is insigni…cant. In particular, the empirical application of the three models developed in this thesis concern the Kiti aquifer, situated in a coastal region in the island of Cyprus. This aquifer su¤ers from serious depletion and quality deterioration and faces the danger of complete exhaustion of its water in the near future. Thus, the assumption of in…nite hydraulic conductivity (that implies that the aquifer will never dry up irrespective of groundwater extraction rates) adopted by all

models reviewed in this chapter79_{, should not and does not characterize our theoretical and}

empirical investigations. Moreover, the Kiti aquifer is a small aquifer as far as storage

The material in chapter 3 is a direct extension of the reviewed literature. The key contribu- tion of this chapter is the explicit recognition of the potential for in…nite production of water through the existence of a backstop technology. In particular, we develope a model that de- rives groundwater scarcity rents and management bene…ts under the assumption of endogenous adaptation to a backstop technology that allows in…nite production of water to the inde…nite future. The availability of a backstop technology is a realistic aspect of groundwater manage- ment that has been ignored by the relevant literature and can potentially contribute to the elimination of the GSE. The derived solutions of this model under optimal and no-control of groundwater extraction, provide the benchmarks for inferences on extraction behaviour implied by the econometric estimates of scarcity rents derived in the two consecutive chapters of the thesis. Chapter 4 combines the hedonic and travel cost methods, in order to develop a hedonic model consistent with endogenous selectivity, for indirect estimation of the marginal willing- ness to pay for scarce groundwater quality, from data on land prices and land characteristics. Chapter 5 derives the shadow price of groundwater by employing a method prevalent in the literature of productivity theory, but not yet used -to the best of our knowledge- for valuing

in situ natural resources. Chapter 6 contrasts and compares derived results, and concludes the

thesis by inferring the form of extraction behaviour relevant for the aquifer under consideration, and by discussing the potential for its management.

Chapter 3

Dynamic Sectoral Adaptation to