Abstract
In this paper, we attempt to quantify the shadow price of an additional inch of groundwater resource left in situ for the Southern Ogallala Aquifer. Previous authors have shown the degree to which the optimal resource extraction path may diverge from the competitive extraction path based upon varying assumptions. We utilize high-quality data over an unconfined groundwater resource to evaluate the validity of these results. We find that the size of the existing groundwater resource is sufficiently small to result in a divergence between the competitive and socially optimal solutions. We are also able to confirm that the model responds to changes in the parameters in a manner consistent with previous research. Finally, we arrive at a marginal user cost for an additional acre-inch of water which is relatively low, but reasonable given uncertainty about future technological improvements.
Highlights
The most dramatic externality imposed on society through the use of a nonrenewable resource is the loss of that resource for future uses
We attempt to quantify the shadow price of an additional inch of groundwater resource left in situ for the Southern Ogallala Aquifer
We find that the size of the existing groundwater resource is sufficiently small to result in a divergence between the competitive and socially optimal solutions
Summary
The most dramatic externality imposed on society through the use of a nonrenewable resource is the loss of that resource for future uses. Maximizing a value function representing the future stream of net benefits to producers subject to the constraint of a finite resource, we arrive at the Hotelling rule for optimal resource extraction This “rule” states that the percentage change in the current-value shadow price of the resource between each period should equal the discount rate if the resource is to be extracted optimally. We are interested in determining the social cost associated with extracting an additional unit of the resource beyond the socially efficient level Such a valuation would serve to further inform water policy in the study region. In addition to arriving at a shadow price for the remaining water in the aquifer, we wish to evaluate the divergence between the optimal extraction path and the competitive path.
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