A Hybrid Price-Quotas Policy to Control Natural Resource Usage Reinforces the Robustness of Both Instruments Against Lobbying : Theory and Application to Irrigation Water in Israel

We characterize the political equilibrium in a game in which the use of a natural resource is controlled by a hybrid policy that integrates a uniform price and user-specific quotas. Because lower quotas reduce the benefits of the resource users from a lowered price, and a higher price diminishes users' gains from larger quotas, the integration of the two instruments reinforces the robustness of each against lobbying for lower prices and larger quotas. We show that the resource consumption declines under a hybrid regime that follows a quotas-only regime. However, the social welfare rank of the hybrid policy versus the quotas-only and price-only counterparts is an empirical question. We use the equilibrium conditions to derive a structural discrete/continuous choice model that enables estimating resource-demand functions and two political parameters: the political influence of the controlled industry and the level of participation in the collective lobbying for reduced prices. We employ the model to irrigation-water data from Israel in the late 1980s, which was controlled by a hybrid policy, and obtain empirical support to the theoretically predicted reinforcement effect. Simulations of political equilibria under the quotas-only, price-only, and hybrid regimes indicate dominance of the latter in terms of social welfare