A micro-econometric approach to deriving use and non-use values of in situ groundwater: The vosvozis case study, Greece

Abstract

The objective of this work is to derive the in situ shadow price of unextracted groundwater in the Vosvozi aquifer, through modelling and empirically analysing the technology of vertically integrated agricultural firms that both extract and use groundwater as an input in their production. This shadow price, also referred to as the resource’s scarcity rent or royalty, represents the marginal valuation of the individual agricultural producer for the resource left in situ and is not directly observable. In the model developed, the non-observability of the in situ shadow price of groundwater is caused by the fact that market transactions in vertically integrated agricultural firms occur only after groundwater has been extracted and used in the production of agricultural products; that is, there is no market for groundwater. This research uses duality theory in order to derive information on the in situ shadow price of the resource and the effects of cumulative extraction on the marginal cost of extraction. First, we solve the ‘restricted’ version of the dual cost minimization problem of the vertically integrated agricultural firm. The solution of this problem establishes the relationship between the current (unobserved) in situ shadow price of groundwater in the unrestricted solution of the problem, with the derivatives of the observable and estimable restricted cost function.