Group for Research in Decision Analysis

Extraction cost: Before or after harvesting? Economic and environmental consequences

Alain Jean-Marie Centre de Recherche de Sophia-Antipolis Méditerranée, INRIA, France

We consider a discrete time, infinite horizon dynamic game of groundwater extraction where the marginal cost depends on the level of groundwater. Our main aim is to point out the importance of the moment where this cost is announced: before or after the extraction or rainfall. In the linear-quadratic case we compare the equilibrium for the different announces. Also we perform a sensitive analysis as function of the discount factor.

We show that when the level of the groundwater is small, announcing costs after harvesting and rainfall is better from the economic and environmental point of view than the standard literature case where the cost is announced before rain and harvesting.

We also consider a Stackelberg game where the leader (a regulator) decides at each time which kind of cost he must announce in order to maximize his welfare function.

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