Is the Gisser and Sanchez model too simple to discuss the economic relevance of groundwater management?
Résumé
This paper discusses the framing of the model of Gisser and Sánchez (1980) [9] which is commonly reproduced by the follow-up literature. We note that results on the magnitude of welfare gains from optimal groundwater management are affected by the models׳ limitations, such as the commonly used assumption on the linear relationship between pumping cost and the water table level, and the absence of considerations for non-consumptive benefits. We question the appropriateness of these assumptions since the stock effect (the dependence of extraction cost and/or that of benefits on the stock of resource) affects the time variation of the shadow price. We demonstrate that this leads to a declining value of in situ resource over time. As such, its addition on marginal extraction cost may be negligible, and consequently favors the validation of the Gisser-Sánchez effect.