Template-Type: ReDIF-Paper 1.0
Author-Name: Eirik S. Amundsen
Author-Name-First: Eirik S.
Author-Name-Last: Amundsen
Author-Email: Eirik.amundsen@uib.no 
Author-Workplace-Name: Department of  Economics, the University of Bergen
Author-Workplace-Name: Department of Food and Resource Economics, University of Copenhagen
Author-Name: Frank Jensen
Author-Name-First: Frank
Author-Name-Last: Jensen
Author-Email: fje@ifro.ku.dk
Author-Workplace-Name: Department of Food and Resource Economics, University of Copenhagen
Title: Drought and Groundwater Management 
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.
Length: 28 pages
Creation-Date:  2016-06
File-URL: http://okonomi.foi.dk/workingpapers/WPpdf/WP2016/IFRO_WP_2016_04.pdf
File-Format: Application/pdf
Number: 2016/04
Classification-JEL: Q20, Q22
Keywords: drought, groundwater management, uncertainty
Handle: RePEc:foi:wpaper:2016_04