Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 05/16: Drought and groundwater management

Eirik Schrøder Amundsen () and Frank Jensen ()
Additional contact information
Eirik Schrøder Amundsen: Department of Economics, University of Bergen, Norway, Postal: P.O.Box 7800, 5020 Bergen, Norway
Frank Jensen: Department of Food and Resource Economics, University of Copenhagen, Postal: P.O.Box 2177 , 1017 Copenhagen, Denmark

Abstract: This paper considers the problem of a water management authority faced with the threat of a drought that hits at an uncertain date. Three management policies are investigated: i) a laissez-faire (open-access) policy of automatic adjustment through a zero marginal private net benefit condition, ii) a policy of optimal dynamic management ignoring the threat of the drought and relying on automatic adjustments through a zero marginal social net benefit condition, iii) an economically optimal dynamic policy taking account of the threat of a drought. In particular, we show that the optimal pre-drought steady-state equilibrium stock size of water under policy iii) is smaller than under policy ii) and, hence, a precautionary stock size should not be built up prior to the drought.

Keywords: Drought; Groundwater management; uncertainty

JEL-codes: Q20; Q22

34 pages, June 27, 2016

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