Quantity and quality management of groundwater: An application to irrigated agriculture in Iraklion,Crete

A quantity-quality problem in which pollution generates production externalities is analyzed empirically. Water is pumped by farmers from a common access aquifer, and deep percolation resulting from the irrigation causes accumulation of pollutants in the aquifer. Pollution negatively affects the production of the agricultural output through the deterioration of the groundwater quality. By comparing the cooperative with the noncooperative solution, an optimal policy scheme in the form of water taxes is determined. The scheme induces farmers acting noncooperatively to follow policies that correspond to the regulator's optimum. The model is applied to the case of groundwater management in the Iraklio prefecture of Crete. Agricultural production functions are estimated using an externality variable as explanatory variable. An optimal control model that corresponds to the cooperative solution is solved using multiple shooting methods. Paths for water stock, salinity stock, and water use at the regulator's optimum are derived. The optimal water tax is calculated in the final stage.