Environmental and Resource Economics Review (자원ㆍ환경경제연구)

Korean Resource Economics Association (한국자원경제학회)
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Real Options Analysis of Groundwater Extraction and Management with Water Price Uncertainty

  • Lee, Jaehyung (Corporate Customer Group, Industrial Bank of Korea)
  • Received : 2018.05.08
  • Accepted : 2018.09.28
  • Published : 2018.12.31
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Abstract

This paper analyses the investment options of groundwater development project under water price uncertainty. The optimal investment threshold price which trigger the investment are calibrated base on monopolistic real options model. Stochastic dynamic model is set to reflect the uncertainty of water price which follows the GBM (Geometric Brownian Motion) process. Our finding from non-cooperative investment decision model is that uncertainty of water price could deter the groundwater investment by considering the existence of option values. For policy markers, it is easy to manage 'charges for utilization of groundwater' rather than 'performance guarantee ratio' when managing groundwater investment with pricing policy. And it is necessary to make comprehensive and well-designed policies considering the characteristics of regional groundwater reservoir and groundwater developers.

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References

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