It is widely accepted that water markets can support adaptation to climate change. However, quantifying this adaptive capacity is difficult as it requires models that represent both stochastic water supplies and forward-looking behaviour by market participants. We develop a stochastic dynamic model of the Murray-Darling Basin water market in which irrigators form rational expectations over future water prices, and make monthly water use, annual crop planting, and long-run investment decisions. The model is solved using reinforcement learning methods to approximate expectations, combined with mathematical programming to estimate market equilibrium. We validate the model against observed prices and irrigation activity from 2008 to 09 to 2021–22 and apply it to an ensemble of 37 CMIP6 climate projections for the southern Basin. Under drier future climates, water markets support adaptation through increased inter-regional trade flows into the downstream Murray, and larger storage reserves through more conservative crop planting. However, under the driest projections, inter-regional trade constraints bind, price differences widen across zones, and long-run irrigation development contracts by up to 16 per cent. The results highlight both the value and the limits of market-based adaptation, with implications for the design of water market institutions under a non-stationary climate.
The economic impact of protected areas (PAs) on local development remains a debated topic in regional economics, particularly in peripheral regions facing demographic and economic decline. While protected areas provide essential ecological benefits, their effects on local economies remain debated, with concerns about land-use restrictions potentially limiting economic opportunities alongside potential gains from tourism and ecosystem services. This study investigates the causal effect of PAs on per capita income in Italian municipalities classified as inner areas under the National Strategy for Inner Areas. We exploit variation in the share of municipal land covered by protected areas using a Difference-in-differences approach with continuous treatment in a dose-response framework. The results show a robust, positive, and statistically significant relationship between PAs and local economic growth. The expansion of protected areas is associated with increased per capita income, suggesting that environmental protection contributes to development in Italy’s marginalized inner regions.
This paper studies the consequences of a cap-and-trade policy in the presence of a pollution externality and firms that may automate vacancies that are not matched to workers. We find that the emissions cap dampens the share of firms using robots, that is, a composition effect. This effect appears during the nonlinear transition to, and at, the long-run equilibrium with reduced carbon emissions, as well as over the cyclical fluctuations following productivity shocks. The effect implies that the adoption of robots is more elastic than the labor matches with respect to vacancies which fall when the emissions cap becomes more binding and contracts the economy. The effect is slightly amplified under a higher emissions rate for robot firms than for labor firms.
We study optimal management of the standard shallow lake model with special attention to the damage caused by the accumulated phosphorus in the water of the lake. The occurrence of a tipping point leads to a stronger increase in the damage after moving from the low-damage to the high-damage regime, because of the loss of ecosystem services. We modify the standard quadratic damage function by introducing a jump in marginal damage when moving from the low-damage to the high-damage regime. Connecting the lower and the higher marginal damage functions yields a continuous piecewise linear marginal damage function with a strong increase around the jump. In addition to the well-known oligotrophic and eutrophic steady states, we find that a third steady state can occur, separated by two Skiba points. This implies that a corridor or a basin of attraction arises between these two Skiba points where optimal management of the lake stabilizes the amount of phosphorus somewhere in the middle instead of either moving to the low-damage or to the high-damage regime, as is the result in the standard knife-edge case with one Skiba point.
This paper aims to explore the impact that hybrid-work schedules will have on urban spatial structure and how that in turn will impact urban residential water demand. I develop a variant of the monocentric city model in which workers have an additional margin in their housing consumption decision through the choice of both indoor floor area and outdoor yard area, both of which require water as an input. The transition to a hybrid work schedule impacts households through three channels: (1) a decline in commuting costs, (2) additional demand for home-office space, and (3) a potential decline in wages through lost agglomeration economies due to fewer in-person interactions. The analysis suggests that the city may expand or contract, and aggregate water use could rise or fall when hybrid-work is introduced, depending on whether the reductions in commuting costs outweigh the additional costs of home-office space and lower wages from reduced agglomeration externalities. When aggregate water use does rise, this increase is less pronounced for households in suburban areas, which become denser and land becomes relatively more expensive, slowing the demand for additional yard space. In contrast, households located closer to the core use relatively more water as land values fall and average housing consumption rises. I extend the model to consider four additional components: subsidizing in-person work, increasing marginal water prices, improvements to home water use technology, and year-round lawn irrigation.
