(Anti-)coordination problems with scarce water resources

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14 January 2014

This paper deals with the interactions between farmers who can choose between two water supplies (groundwater or rainwater) which are interdependent and have different productivities. Collecting rainwater reduces the amount of water that can replenish the aquifer and allows farmers to avoid the pumping cost externality (but increases the cost of pumping groundwater). We show that multiple equilibria can exist. For a policy-maker, this immediately raises the equilibrium selection issue. This problem is worsened by the fact that the number of equilibria increases with a decrease in the recharge rate. In addition, comparative statics show that, depending on the equilibrium, a policy intervention can have opposite effects. Finally, we show that asymmetric equilibria can also exist, when one group of farmers chooses to harvest rainwater to avoid the pumping cost externality and the other group chooses to pump groundwater.