Cooperative Solution of Local Externality Problems: A Case of Mechanism Design Applied to Irrigation

Cooperative solutions to ameliorate externalities may be Pareto superior compared to noncooperative abatement strategies, but such solutions may not be adopted without appropriate institutional mechanisms. To achieve cooperative outcomes voluntarily, there must be methods of determining cost shares and identifying preferred solutions. Here, the design of a process and a related algorithm are proposed, based on concepts of welfare economics and game theory for public goods and externalities. Simulation of the process for an irrigation externality problem in the Central Valley of California demonstrates existence of a unanimously preferred solution with improved water quality.