Classwork 4
Designing Rules for a Shared Aquifer
Four farms draw groundwater from the same aquifer. Pumping more water can raise one farm’s crop revenue today, but it lowers the water table and raises future pumping costs for every farm.
The county is considering new rules for pumping and a public groundwater-monitoring program. Your job is to diagnose the incentives before recommending an institution.
Task 1 · Identify the resources
For each resource below, decide whether its use is rival and whether users are excludable. Then name the type of good or resource.
- Groundwater in the aquifer: water pumped by one farm is no longer available to the other farms. Without meters or enforceable rules, it is difficult to prevent a nearby farm from pumping.
- A county groundwater report: after the report is posted online, one person’s use does not reduce what others can learn from it, and anyone can read it.
Then answer these questions:
- Is calling the aquifer a common-pool resource a statement about its physical characteristics, its governance, or both?
- Why are common property and open access not the same arrangement?
Task 2 · Read the pumping incentive
Each farm simultaneously chooses Regular pumping or Extra pumping. Choosing Extra means pumping one additional acre-foot.
- Extra pumping gives the farm that chooses it $30 in additional crop revenue.
- Each extra acre-foot creates $10 in next-season pumping costs for each of the four farms, including the farm that pumped it.
- Treat all other revenues and costs as unchanged.
- Suppose the other farms’ choices are fixed. If your farm switches from Regular to Extra:
- How much additional revenue does your farm receive?
- How much additional future cost does your farm bear?
- What is the net change in your farm’s own payoff?
- Based on that private payoff, which choice will each farm be tempted to make?
- Complete the table for the four farms together.
| Farms choosing Extra, N | Total extra crop revenue | Total drawdown cost | Change in the four farms’ combined payoff |
|---|---|---|---|
| 0 | |||
| 1 | |||
| 2 | |||
| 3 | |||
| 4 |
- Does one more Extra choice increase or decrease the four farms’ combined payoff? What outcome is socially efficient?
- Of the $40 total drawdown cost caused by one farm’s Extra choice, how much is an external cost to the other farms?
- Explain in one or two sentences why the private incentive and the socially efficient outcome differ.
Task 3 · Compare three rules
The county considers three arrangements for the same aquifer.
Rule A · Unrestricted basin
Any nearby farm may pump. There is no registry, meter, or enforceable limit.
Rule B · Water-user association
Only registered members may pump. Members vote on a group limit, every well is metered, an elected monitor reports use, and the association applies an agreed penalty when a member exceeds the limit.
Rule C · Individual pumping allowances
The county assigns each farm an enforceable annual allowance. A farm may transfer unused units to another registered farm, and all pumping is metered.
- Complete the institutional diagnosis.
| Question | Rule A | Rule B | Rule C |
|---|---|---|---|
| Who may pump? | |||
| Who can exclude unauthorized users? | |||
| Who monitors and enforces the rule? | |||
| Can an individual transfer a use entitlement? | |||
| Governance regime |
- Which rule or rules have the strongest exclusivity, enforceability, and transferability? Support each choice with one feature of the rule.
- Under which rule is the incentive from Task 2 most likely to remain? Explain.
- A rule written on paper may still fail. Identify one practical condition needed for Rule B or Rule C to work as intended.
Task 4 · Provide groundwater information
The county can publish up to three groundwater reports per year. Each report costs $40. The table gives each beneficiary’s marginal willingness to pay for one additional report.
| Additional report | Farm A | Farm B | Town residents | Social marginal benefit |
|---|---|---|---|---|
| 1st | $30 | $20 | $20 | |
| 2nd | $20 | $15 | $15 | |
| 3rd | $10 | $5 | $5 |
- Why do we add the three marginal benefits vertically for a public report?
- Complete the social-marginal-benefit column.
- How many reports are efficient? Use the marginal rule: provide another report while its social marginal benefit is at least its marginal cost.
- What is the total net benefit from the efficient number of reports?
- Why might voluntary donations provide fewer reports than the efficient number?
- Suggest one way to finance the reports. State one advantage and one distributional concern.
Task 5 · Recommend an institution
Write a 120–160 word recommendation to the county. Your recommendation must state:
- who may pump;
- what pumping limit or allocation rule applies;
- what will be measured;
- who will monitor and enforce the rule;
- how the groundwater reports will be funded;
- one transaction-cost or fairness concern; and
- how your proposal changes the private incentive identified in Task 2 while protecting the shared stock.
Exit sentence
Complete this sentence in one or two lines:
A shared natural resource is more likely to be conserved when an institution makes resource users __________ because __________.