Designing environmental regulations with empirical microparameter distributions: the case of seawater intrusion

Economists have long recognized the problems inherent in the concept of aggregate capital, and have expended considerable effort to develop models with heterogeneous input quality. One such framework is the putty-clay, or microparameter model introduced by Houthakker (1955), Johansen (1959) and Solow (1962). The basic assumption of the microparameter framework is sensible: before investment takes place, the entrepreneur has a choice over a large number of possible production techniques. A theoretical innovation is made and variable input and output prices are allowed to differ among production units. The relative efficiency of various environmental taxes, including pollution, input and fixed factor charges are considered. The relevance of the microparameter framework to water resource problems by showing that it is consistent with agronomic observations on water productivity.