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Abstract
This paper uses a control theory approach to analyse the collectively optimal rate of
extraction along a river system and constructs a bidding mechanism that would produce
the required prices at each point. It also analyses some characteristics of this
mechanism. This approach brings some new perspective to existing work on externalities.
It also helps bring to light some aspects of the system as a whole that may be less
obvious in a more piecemeal analysis, including the fact that there may not be an optimal
solution to the allocation problem. Although the bidding mechanism may be difficult
to implement, it may be possible to design various forms of hybrid schemes that
have practical value.