The Strategic Interdependence of a Shared Water Aquifer: A General Equilibrium Analysis

In a region with shared water aquifers, the use of water by one country becomes an externality to another. A policy to subsidize water is shown to lead to both countries being made worse off, but is likely to be supported by special interests having water rights, and those in sectors such as agricultural that uses water relatively intensively. The unilateral water tax will reduce own country's GNP and rise GNP in the other country. Only when both countries impose a tax cooperatively, will GNP rise in both countries.