Regulating Groundwater Use in Developing Countries: A Feasible Instrument for Public Intervention

Worldwide groundwater is a common-pool resource that is potentially subject to the tragedy of the commons if water extraction is not adequately regulated. In developing countries the regulatory infrastructure is often too weak to allow detailed monitoring of individual groundwater extraction. For this reason, classical public intervention instruments, such as consumption fees or tradable quotas, are infeasible. Here we present a theoretical foundation for a new public regulatory instrument that can potentially generate the same efficiency-inducing incentives as fees and tradable quotas, but without their information and monitoring requirements. The instrument we propose is a tax based on aggregate extraction rather than on individual extraction measures.