Optimal economic management of groundwater quantity and quality: An integrated approach

Loosely defined institutional arrangements for groundwater give rise to externalities that hasten the depletion and degradation of the resource, thus reducing potential economic benefits. Implementing policy measures to correct perceived extraction or pollution externalities is an approach often proposed. This thesis contributes to the discussion by suggesting that the correct management approach is one that accounts for the economic interrelationships between extractive and non-extractive uses of the aquifer. Interrelationships are examined with the aid of a dynamic programming model that maximizes the net present value of drinking water benefits and agricultural waste assimilation benefits under (a) common pool institutional arrangements and (b) integrated management arrangements. Agricultural waste assimilation in the aquifer is used to model the non-extractive use.; A central result of the optimization problem is that optimal choices of groundwater extraction and agricultural waste assimilation are determined simultaneously in an integrated management approach. Thus, a common pool groundwater management regime or any regime that emphasizes only one area of concern (e.g., extraction or pollution) will be sub-optimal.; The model is applied to an aquifer management problem in Wilmot Township, Ontario. Extractive benefits are measured using water demand functions. Agricultural waste assimilation benefits are obtained using farmers' marginal abatement cost functions for nutrient waste. Empirical results show the present value of aquifer benefits achieved under current common pool institutional arrangements, are sub-optimal. Where the cost of switching from one management approach to another is zero, the integrated approach is always optimal. The estimated welfare loss under common pool institutions is less than 1% of potential economic benefits under an integrated approach. The policy implication for groundwater management in Ontario is that high implementation costs associated with an integrated approach could exceed the potential benefit, thus making the common pool outcome desirable.; Non-integrated groundwater management regimes intended to address extraction or pollution externalities without accounting for economic interrelationships could yield lower aquifer benefits than under the current common pool regime they were meant to improve.; Factors influencing the optimal allocation of activities most are the marginal value of the aquifer for waste assimilation, the natural rate of decay of nutrient in groundwater, the cost of treating water for nutrient contamination, and the marginal benefit function of groundwater extracted, respectively.