Rationing the Commons: A Research Program on the Efficiency of Institutions for Groundwater Management

Yale University, New Haven CT

Investigators

Abstract

Society has clear ideals of how to manage common resources (commons); however, commons fail---carbon dioxide fills the air, fisheries collapse, and wells dry up. Two methods that are used to manage the commons formal method which imposes taxes, and informal community management that limits access---have problems. Taxes on the use of commons are difficult to collect and may harm some low-income users while local controls cannot meet the large amount of resources required to manage the commons. This proposed research will use field experiments and economic theory to develop a "second best" commons management model that combines both methods of managing the commons mentioned above. The model is then tested for efficiency in managing ground water commons; the research also calculates the efficiency gains from using this new management approach. The results of this research project will provide important tools to manage the commons, such as air quality, water, and parks among others. This will not only improve efficiency in resource management in the US; it will also establish the US as the global leader in management of the commons. The research program has two parts. The first part studies the efficiency of current institutions for managing groundwater commons. The main institution for groundwater management in many countries is electricity rationing. Farmers use electric pumps to extract water with heavily subsidized electricity, so they over use this "free water". The state knows little about the value of the commons for users but can enforce limits on electricity use. This research will estimate enough statistics for efficiency loss from this commons management regime and then estimate a structural model of agricultural production to study the efficiency of counterfactual management policies, such as pricing power and water. The second part will test a new commons policy through a field experiment. The policy, Direct Benefit Transfers for Electricity, raises the marginal price of electricity in exchange for lump-sum transfers that compensate for the loss of marginal electricity subsidies. The outcomes of power and water savings and agricultural adaptation in the experiment will mirror the structural estimates of the response of farmers to higher power prices. In this way, the research program will both estimate a model to study a new commons policy and validate the gains from that policy in a field experiment. The results of this research will improve the efficiency of resource allocation and therefore increase economic efficiency in the US and throughout the world. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.