Strategic Behavior and Efficiency in the Common Property Extraction of Groundwater

Abstract

Groundwater has always been regarded as a common property resource where entry is restricted by land ownership and private exploitation is inefficient. In 1980, Gisser and Sánchez presented a first estimation of this inefficiency, cornparing socially optimal exploitation with private (competitive) exploitation using a model with linear water demand, average extraction cost independent of the rate of extraction and linearly decreasing with respect to the water table level. They characterized the private exploitation of the aquifer assuming that farmers are myopic and choose their rate of extraction to maximize their current profits, whereas optimal exploitation is obtained by maximizing the present value of the stream of aggregate profits. Their results show that if the storage capacity of the aquifer is relatively large, the difference between the two systems is so small that it can be ignored for practical consideration. This result has been called the Gisser— Sánchez rule by Nieswiadomy (1985) and it has and important policy implication: regulation of the resource does not seem justified since the profits it brings are not very high.¹

This paper was presented at the Symposium on Water Resource Management: Efficiency, Equity and Policy, Nicosia, Cyprus, September 22–24, 2000. A first version of this chapter has circulated as Working Paper of the Instituto Valenciano de Investigaciones Económicas (Valencian Institute of Economic Research).