Academic journal article Economic Inquiry

Governing a Groundwater Commons: A Strategic and Laboratory Analysis of Western Water Law

Academic journal article Economic Inquiry

Governing a Groundwater Commons: A Strategic and Laboratory Analysis of Western Water Law

Article excerpt

I. INTRODUCTION

Between the poles of rent maximization and complete rent dissipation, wide latitude exists for institutions to manage or allocate common pool resources (CPRs) with reasonable economic performance. Two topics addressed in previous research are salient. One concerns the role of limiting entry by users into a commons. In the seminal article on the economics of CPRs, Gordon [1954] described how monopolist ownership would internalize CPR externalities, thereby creating incentives for rent maximization. Eswaran and Lewis [1984], applying a model of a CPR as a time-dependent repeated game, derived a related analytical result that the degree of rent accrual depends inversely on the number of users depleting the resource. In the context of groundwater, Brown [1974] and Gisser [1983] reasoned that existing laws restricting entry into groundwater CPRs would improve rent accrual. Empirical experience with more than five users, however, reached pessimistic conclusions in two cases. Libecap and Wiggins [1984] found that cooperative behavior in oil pool extraction occurred only with fewer than five firms. Otherwise, state law was required to coerce cooperation with roughly 10-12 firms. Indeed, with hundreds of firms operating in the East Texas oil fields there was no cooperation and, apparently, complete rent dissipation. Walker, Gardner, and Ostrom [1990] and Walker and Gardner [1992] reached a similar conclusion in analysis of data from laboratory experiments on noncooperative game CPRs. A high degree of rent dissipation or a high probability of resource destruction occurred even with access limited to eight users.(1)

The second topic concerns the ability of additional regulations or property rights, other than entry restrictions, to mitigate CPR externalities in light of noncooperative behavior. Forms of property rights, such as firm-specific fishing rights or quotas, are widely recognized as reducing or removing the incentive for a race to exploit a CPR, as in Levhari, Michener, and Mirman [1981]. Specific to groundwater, Smith [1977] recommended that rights to a share of the groundwater stock should replace Arizona's then-existing rule-of-capture, while Gisser [1983] noted that New Mexico's individual rights to annual water quantities, combined with a guaranteed time period of depletion, effectively define a share right in the stock. Both reasoned that this form of property right - stock quotas - would go far toward achieving optimal groundwater depletion.

State governance of groundwater resources in the western United States provides an institutional setting to study the effect of property rights and regulations on rent appropriation. Sax and Abrams [1986] and Smith [1989] write that, in the early- to mid-1900s, independent state authority over groundwater resulted in adoption of four distinct legal doctrines governing groundwater use in the 17 western states. Each doctrine established a set of principles directing entry and allocation rules. Further, concern about the pace of groundwater mining has spawned major legal reforms in five states within the last 25 years.(2) The reforms primarily involved adopting specific regulations that either limit entry into groundwater basins to the set of existing groundwater pumpers or define permit systems setting quotas on individuals' pumping levels, or both. The variety across states of general doctrinal principles and specific regulations creates a diverse set of groundwater property-right systems in the West.

This paper develops and empirically applies a modeling framework of governing a groundwater CPR. Section II qualitatively describes the groundwater property-right systems in the West in terms of externalities present in a groundwater commons. Following the literature on CPRs as dynamic games originating in Levhari and Mirman [1980], Eswaran and Lewis [1984], and Reinganum and Stokey [1985], section III develops a formal model in which depletion from a fixed stock is modeled as a noncooperative game. …

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