Game-Theoretic Incentive Design for Sustainable Groundwater Management

Mismanagement of groundwater resources is a classic example of the tragedy of the commons, with individual users (e.g., farmers) overextracting a shared resource to maximize their private benefit. To address this issue, we propose a novel incentive mechanism that leverages a differential tax structure to regulate groundwater consumption. Our framework models the interaction between a water agency and water consumers as a Stackelberg game, where the agency sets two tax rates: a lower rate for users who voluntarily install water meters and a higher rate for those who choose not to. By incorporating strategic reporting behavior and uncertainty in compliance monitoring, we identify optimal tax policies that maximize social welfare while minimizing environmental harm. We demonstrate the efficacy of this policy through numerical simulations based on Western La Mancha aquifer usage data.