Incentive Utilization model to avoid Localized Groundwater Overdraft

Water is the most important resource for our survival, and it is also a widely misused resource on earth because of its abundant and renewable nature. Most developing and developed economies use groundwater when surface water is scarce or polluted. In some region, groundwater is the only water resource available in dry season or simply because of low annual rainfall. However, since groundwater can be renewed if used properly (that is, in a sustainable way), the economy might take nature’s bountifulness for granted and overdraft. The problem of overdraft could be emanated from an incentive issue because groundwater is a common resource and the phenomenon of “the tragedy of the commons” (Hardin [3]) prevailed. For some communities, groundwater is a common pool resource, that is, all members of the community have access rights, and there’s no legal restriction or option for the community to exclude the extraction of groundwater. And land subsidence is result of the groundwater overdraft. As a result, soil salinization and seawater intrusion severely hampered the economic progress of the coastal region of Taiwan, because the once fertile land became barren and hazardous even for homeowners to reside.

 Groundwater overdraft happened when farmers and producers, from aquaculture, agriculture, or even the manufacture sector, that use the same source of groundwater (from the same aquifer) act non-cooperatively or selfishly. Selfishness or rationality assumption is a norm in most economic analysis. However, as described in McCarthy et. al [4], some communities do cooperate and manage their common pool resources successfully, albeit with costly rule-setting, monitoring, and enforcement mechanism. Much of the literature relied on centralized rule-setting and sanctioning power to enforce and to implement the mechanism, such as McCarthy et. al [4] and Coperland et. al [2]. But centralized authority might not be as effective as we assumed, as Agrawal [1] observed that "in the Kumaon region of the Indian Himalaya, villagers often set the forest on fire, because fire encouraged the production of fresh grasses, government attempts to prevent firing were always to remain a source of complaint". Although McCarthy et. al [4] recognized that “the threat of exclusion” is not possible and enforcing it is extremely costly, a community can act collectively and can manage their common pool resources efficiently, but their mechanism still rely on regulator’s “explicit supervision and punitive action to enforce the cooperative agreement”, while Copeland et. al [2] incorporate regulator’s enforcement power into their framework directly. Even though they acknowledged that “poverty and government corruption” and international trade surely caused the misuse of common resources, their mechanism still needs an enforcer, i.e. the government. And their model assumed a “continuum of agents” that face a constant instantaneous probability of death, that is, the number of agents is infinite and they live in a continuous timeline. Although a continuum of agents and timeline is mathematically sound and impressive, but it is unrealistic and it will not solve our problem realistically. An infinite number of participants will cause a major free-rider problem, and a huge transaction cost. With a capable enforcer, the cost of supervision, sanctioning, and complying might be reduced to a tolerable level. But most modern government struggled just to get by, not to mention the fact that a modern government is a complex machine of legislation, lobbying, and regulating, public funding, and so on. 

Our focus in this paper is the groundwater management of a small coastal community in Taiwan. Ostrom [6] found that a small community can better manage their common resources than a larger one, because the transaction costs is lower, while Olson [5] argued that cooperative agreement is easily complied and observed, because no action is anonymous in a small community, that is, no free-riding problem. In this paper, we develop a framework of a “decentralized” infinitely repeated game model to examine the outcome and to investigate the effect of some important factors. Just as the concluding remark in Agrawal [1], “The legitimation of authority occurs not through collective visions of dazzling development projects, but by the promise of meeting local needs indefinitely into the future if current consumption is restrained.”. Our model is one step away from traditional mechanism framework, in the sense that we do not consider the “social planner” or government as the enforcer, but the community itself as a collective entity and members can negotiate and to agree or disagree (deviate). We will develop and characterize the decentralized game-theoretical model in section 2. The ensuing discussion will be in section 3. Section 4 is the conclusion.