Problems, Principles and Policies
Edited by Phoebe Koundouri, Panos Pashardes, Timothy M. Swanson and Anastasios Xepapadeas
Chapter 7: Contrasting Different Methodologies to Deriving Natural Resource Scarcity Rents: Some Results from Cyprus
7. Contrasting diﬀerent methodologies to deriving natural resource scarcity rents: Some results from Cyprus Phoebe Koundouri* 7.1 INTRODUCTION TO BACKGROUND RESEARCH Eﬃcient pricing of a resource incorporates marginal cost of extraction and scarcity rents. Since groundwater resources exhibit natural supply constraints, scarcity rents must be imposed on current users. Due to the absence of clear groundwater ownership rights, extracting behaviour is myopic and extracting agents are willing to pay only the private cost of their groundwater extraction. As a result, scarcity value goes unrecognized and as such is diﬃcult to estimate. This results in ineﬃcient pricing and misallocation of the resource, and calls for intervention in the relevant resource market. The main aim of this chapter is to compare and contrast results from two alternative methodologies that allow indirect estimation of shadow groundwater scarcity rents and derive inference on the potential for managing this resource. Empirical analyses are based on economic and hydrological data collected for the region of Kiti in the island of Cyprus, representative of coastal semi-arid regions. The background research on which this chapter is based can be found in Koundouri (2000) and a number of relevant papers. These papers are brieﬂy introduced in this section in order to facilitate the reader’s understanding. In Koundouri (forthcoming) we critically assess previous theoretical and empirical attempts to calculate welfare gains from implementing eﬃcient groundwater pricing and examine the potential for groundwater management. This potential is seriously challenged by Gisser-Sánchez’s Eﬀect (GSE)...
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