Water, externality and strategic interdependence: 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. However, such policies tend to receive the support of special interests having water rights, and those in sectors such as agriculture that uses water relatively intensively. A unilateral water tax will reduce own country's GDP and rise GDP in the other country. Only when both countries impose a tax co-operatively, will GDP rise in both countries. Copyright © 2000 John Wiley & Sons, Ltd.