Property Rights Revisited: An Analytical Framework for Groundwater Permit Market under Rule of Capture

This paper revisits the water deeds approach first proposed by Vernon Smith to construct an agent level dynamic optimization model using a simple discrete time framework. First a model of groundwater exploitation for a depletable aquifer is examined. Next an agent level model is solved allowing the agent to trade in the stock of water available at any point in time. The paper illustrates the importance of permit trading in instilling conservation incentives within individuals within a common property framework and explores the role of permit price in encouraging efficient allocation of water among users of a depletable aquifer subject to rule of capture.