Competitive versus efficient extraction of a common property resource: The groundwater case

Abstract In this paper socially optimal and private extraction of a common property aquifer are compared. Open-loop equilibrium and feedback equilibrium in linear strategies have been computed to characterize private extraction. The use of these two equilibrium concepts allows us to distinguish between cost and strategic externalities as long as the open-loop solution captures only the cost externality, and the feedback solution captures both. The results show that strategic behaviour increases the overexploitation of the aquifer compared to the open-loop solution. However, if the groundwater storage capacity is large, the difference between the socially optimal and private extraction, the latter characterized by a feedback equilibrium, is negligible.

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