Municipal Groundwater Management: Optimal Allocation and Control of a Renewable Natural Resource

Abstract

Motivated by the increasing challenges of sustaining groundwater reserves in the face of a growing population’s rising demand for freshwater, we study a municipal groundwater management problem to determine optimal allocation and control policies in the presence of water transfer opportunities. Taking into account the salient features of renewability and endogenous extraction costs, we establish and characterize dynamic threshold polices that govern the export or import decisions of a given municipality. Moreover, to assess the resulting water allocation equilibria in the spirit of the Triple Bottom Line (3BL), we ascertain that exporting or importing water through a water market (as defined by an exogenous import/export price) is always detrimental to both society and the environment for the exporter but beneficial for the importer. In contrast, we find that fixed quantity trading between two municipalities (as defined by an endogenously negotiated import/export price) can have both positive as well as negative impacts from a global 3BL perspective. In particular, we find that typical trading scenarios that occur between municipalities can be detrimental to the environment. In addition, we study the implications associated with the growing trend of privatization, and we find that a privatized municipality would be more (less) likely to export (import) water as compared to its non-privatized counterpart, resulting in negative implications for society at a local level. However, privatization can be beneficial to the local environment by way of mitigating the damage caused by the import differential, a phenomenon analogous to the green paradox. Moreover, careful and restricted privatization of municipalities can lead to positive global 3BL impacts as a result of fixed quantity trading.

Keywords: Groundwater Management, Triple Bottom Line, Water Transfers, Privatization