One major concern about the future is that water scarcity will grow, particularly in arid regions where precipitation levels may be reduced by climate change. Will our institutions provide for an efficient response to this problem?

To think about this issue, let’s consider groundwater extraction over time using the two-period model as our lens.

a. Suppose the groundwater comes from a well you have drilled upon your land that taps an aquifer that is not shared with anyone else. Would you have an incentive to extract the water efficiently over time? Why or why not?

b. Suppose the groundwater is obtained from your private well, which is drilled into an aquifer that is shared with many other users who have also drilled private wells.

Would you expect that the water from this common aquifer be extracted at an efficient rate? Why or why not?