Abstract
Despite a voluminous literature on groundwater management, proposals to induce efficient use through pricing or quantity regulations have often been politically infeasible. The common problem with these proposals is that current users are called on to sacrifice in order that future users will be better off. Although total welfare gains are greater than losses, present users are politically more influential than future users (some of whom are unborn) and are therefore able to block reforms. To avoid this problem of political infeasibility, a mechanism for compensating those who lose welfare due to efficient management can be provided. Compensation possibilities to enhance political feasibility have been discussed in general but have not been explicitly developed in an inter-temporal framework. Using the urban Honolulu water district, our objectives are to: 1) compute the efficient allocation of water across time and across locations, 2) compute efficiency prices needed at the margin to support the efficient allocation as a decentralized equilibrium, 3) simulate the effects of the status quo policy of pricing water at average cost of extraction and distribution, 4) estimate the topographic and temporal distribution of welfare gain/loss to users by switching from the status quo to efficiency pricing, and 5) define a lump sum compensation scheme such that the switch to efficiency pricing causes no user to be a net loser.