Municipal Groundwater Management: Optimal Allocation and Control of a Renewable Natural Resource

We study a municipal groundwater management problem to determine optimal allocation and control policies in the presence of water transfer opportunities. We establish and characterize threshold polices governing export or import decisions of a given municipality. In the spirit of the Triple Bottom Line (3BL), we ascertain that exporting (importing) water through a water market defined by an exogenous export/import price is detrimental (beneficial) to both society and the environment within the municipality. In contrast, fixed quantity trading between two municipalities defined by an endogenously negotiated export/import price can have positive as well as negative impacts from a global 3BL perspective. In particular, typical trading scenarios that occur between municipalities can be detrimental to the environment. We also study the implications of privatization, and find that a privatized municipality would be more (less) likely to export (import) water as compared to its non-privatized counterpart, resulting in negative implications for society within the municipality. However, if exports are banned, privatization can benefit the environment by mitigating the damage caused by the extraction differential, a phenomenon analogous to the green paradox. Moreover, careful and restricted privatization of municipalities can lead to positive global 3BL impacts from fixed quantity trading.