The Externalities Associated with the Common Property Exploitation of Groundwater

In this paper the rate of groundwater extraction under the common property arrangement is the outcome of a dynamic game played with feedback strategies. The analysis clarifies the externalities associated with the common property extraction of groundwater and identifies an risk externality that arises when firms are risk averse. Identifying the various externalities bears on the development of appropriate forms of groundwater management. In particular, the risk externality would be unknown to the "watermaster" of a central control agency, suggesting the need for creative, decentralized forms of groundwater management.