Presentations 2016

The paper develops a sustainability model for groundwater economics utilizing concepts from macroeconomics. Sustainability is defined as intertemporal efficiency (Pareto optimality), and intergenerational equity (non-declining utility). The standard groundwater model maximizes present value of net benefits subject to an equation of motion for the resource stock. This model cannot be used as is for sustainability analysis since it is reporting income flows from aquifer usage, while sustainability is defined over consumption streams. Accordingly, the standard model is extended here to include household utility over consumption, a budget constraint, and investment in a human-generated capital stock. The subsequent analysis is conducted utilizing theoretical derivations and a computational model.Normative sustainability conditions are first derived. These include an investment allocation condition analogous to Hotelling’s rule to guarantee efficiency in the economy, as well as sufficient aggregate investment in the economy to maintain intergenerational equity. These normative conditions are then applied to the behavioral regimes of common property, present value optimality and sustainability. Common property is not sustainable due to externalities; however, it can be equitable depending on the household discount rate. Utility present value optimization corrects the externality but does not necessarily result in an equitable solution. The sustainability regime optimizes present value of utility subject to a non-declining utility constraint, thereby ensuring efficiency and equity.Several qualitative conclusions and general insights follow from this setup. First, declining resource stocks can be entirely consistent with sustainability; they are not necessarily indicators of non-sustainability. In fact, resource rents greater than the steady-state may be necessary for sustainability since they provide additional income for investment in capital stocks. Second, common property (unregulated usage) is not the only – or even necessarily the main – cause of non-sustainability, as externality correction alone does not guarantee intergenerational equity. In particular, for the empirical study here, the inefficiency is relatively small, and so sustainability is driven more by rent investment than resource management. Additional policy implications such as sustainability shadow values, extension to uncertainty, and the Hartwick-Solow rule are also investigated.