A hierarchical decision-making approach to resource management and valuation: The case of conjunctive water use

This study demonstrates that Pigouvian taxes derived from the socially optimum shadow prices of shared resources may result in serious deviations between users' response and the socially optimal resource use when the users' profit motive is not shared by the social planner and the resultant objectives differ structurally or parametrically. These concepts are applied to the optimum management of conjunctive use of surface and ground water. Irrigation water pricing reform to improve efficiency and also to increase labor demand are seen as critical issues in India. Therefore, two alternative policy objective (welfare) specifications are considered: (i) maximizing net return to water and land (profit) and (ii) aggregate value added (which includes gross returns to labor). Farmers are assumed to maximize temporal profit in both cases. The inadequacy of the single level conventional (shadow pricing) approach is demonstrated for the latter specification. An alternative bilevel optimization framework is proposed to address the issue. In this approach, the hierarchical decision making, water prices and the profit maximizing behavior of the farmers are incorporated explicitly, for alternative global objective specifications.