Water Management in a River Basin with Downstream Externalities

Most water for agricultural and municipal uses comes from river basins. Traditionally the analysis of trade-offs has been confined to evaluating the marginal value of water in urban and municipal uses. However, return flows from these uses often end up in coastal waters that support downstream shrimp and other fish habitats. We examine this problem by developing a conceptual model of a river basin with multiple uses. We develop equilibrium conditions for water allocation to these alternative uses. A unique feature of this model is that the demand for water may vary due to exogenous conditions, such as drought. We apply this framework to secondary data from a coastal river basin in Georgia to show that only under very unique conditions may this trade-off become meaningful, i.e., upstream water withdrawals may need to be limited to protect downstream benefits. Working Paper Number 2005-001

MODELING THE EFFECTS OF AREA CLOSURE AND TAX POLICIES: A SPATIAL-TEMPORAL MODEL OF THE HAWAII LONGLINE FISHERY

We develop an economic model for a multi-species fishery that incorporates the spatial and temporal distribution of effort and fish stocks. Catchability coefficients and initial stocks are estimated from catch and effort data for each specific location. Vessels are allocated over space and time to locations of maximum profit, which decline with harvest because of stock externalities. A supply function for labor allocation in the fishery is estimated. The simulated model is applied to the Hawaii longline fishery. The economic impacts of regulatory policies, such as reduction of inshore gear conflict and conservation of offshore turtle populations, are examined.Resource /Energy Economics and Policy,

Would Hotelling Kill the Electric Car?

In this paper, we show that the potential for endogenous technological change in alternative energy sources may alter the behaviour of resource-owning firms. When technological progress in an alternative energy source can occur through learning-by-doing, resource owners face competing incentives to extract rents from the resource and to prevent expansion of the new technology. We show that in such a context, it is not necessarily the case that scarcity-driven higher traditional energy prices over time will induce alternative energy supply as resources are exhausted. Rather, we show that as we increase the learning potential in the substitute technology, lower equilibrium energy prices prevail and there may be increased resource extraction and greenhouse gas emissions. We show that the effectiveness and the incidence of emissions reduction policies may be altered by increased potential for technological change. Our results suggest that treating finite resource rents as endogenous consequences of both technological progress and policy changes will be important for the accurate assessment of climate change policy.

"Twin Peaks" in Energy Prices: A Hotelling Model with Pollution Learning

We study how environmental regulation in the form of a cap on aggregate emissions from a fossil fuel (e.g., coal) affects the arrival of a clean substitute (e.g., solar energy). The cost of the substitute decreases with cumulative use because of learning-by-doing. We show that energy prices may initially increase but then decline upon attaining the targeted level of pollution, followed by another cycle of rising and falling prices. The surprising result is that with pollution and learning, the Hotelling model predicts the cyclical behavior of energy prices in the long run. The alternating trends in upward or downward price movements we show may at least partially explain recent empirical findings by Lee, List and Strazicich (2006) that long run resource prices are stationary around deterministic trends with structural breaks in intercept and trend slope. The main implication of our results is that testing for secular price trends as predicted by the textbook Hotelling model may lead to incorrect conclusions regarding the predictive power of the theory of nonrenewable resource economics.dynamic models; energy markets; environmental externalities; global warming; technological change