Problems, Principles and Policies
Edited by Phoebe Koundouri, Panos Pashardes, Timothy M. Swanson and Anastasios Xepapadeas
Chapter 6: A New Methodology for Measuring Groundwater Scarcity: Theory and Application
6. A new methodology for measuring groundwater scarcity: Theory and application Phoebe Koundouri and Anastasios Xepapadeas* 6.1 INTRODUCTION The in situ shadow price1 of (unextracted) natural resources has been one of the key concepts in the theory of natural resource management (Koundouri, 2000; Koundouri, 2000a,b; Koundouri and Groom, 2003). This shadow price is a partial equilibrium price that estimates the individual user’s valuation of the marginal unit of the resource in situ. The value of having available a theoretically sound methodology for estimating the price of unextracted natural resources cannot be overemphasized if one wants to regulate the extraction of these resources and/or test the empirical relevance of the theory of exhaustible resources in explaining producers’ behaviour. The theory was not empirically tested until the second half of the twentieth century. The ﬁrst major problem encountered in testing this theory was the non-observability of the in situ resource price. Relevant solutions oﬀered in the literature amount to either work with the product price (for example, Barnett and Morse, 1963; Smith, 1979; Slade, 1982; Ahrens and Sharma, 1997), which may well be dominated by processing costs, or inferring the in situ price from an estimated equation (for example, Miller and Upton, 1985; Berck, 1988; Stollery, 1983; Farrow, 1985; Slade and Thille, 1997), which * We wish to thank the European Commission, DG XII, Cambridge Commonwealth Trust and Peterhouse of the University of Cambridge, for ﬁnancial support and the Department of Statistics and Research of the Government of Cyprus for providing...
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