PRICING OF WATER-RESOURCES WITH DEPLETABLE EXTERNALITY - THE EFFECTS OF POLLUTION CHARGES

With an abstraction of a real‐world situation, the paper views water resources as a depletable capital asset which yields a stream of services such as water supply and the assimilation of pollution discharge. The concept of the concave or convex water resource depletion function is then introduced and applied to a general two‐sector, three‐factor model. The main theoretical contribution is to prove that when the water resource depletion function is a concave rather than a convex function of pollution, it is more likely that gross regional income will increase with a higher pollution charge policy. The concavity of the function is meant to imply that with an increase in pollution released, the ability of supplying water at a certain minimum quality level diminishes faster and faster. A numerical example is also provided. Copyright 1990 by the American Geophysical Union.