Considering Strategic and Stock Externalities in Common Property Groundwater Management Policies Mahadev G. Bhat 1 A. Rajendra 2 M. G. Chandrakanth 3 1 Department of Environmental Studies, Florida International University, Miami, USA (bhatm@fiu.edu) 2 Department of Agricultural Economics, University of Agr icultural Sciences, Bangalore, India 3 Department of Agricultural Economics, University of Agr icultural Sciences, Bangalore, India (mgchandrakanth@yahoo.com) Abstract In this paper, a differential game theoretic model is applied to the problem of managing common pool groundwater aquifer. Farmers in many parts of India have exploited groundwater aquifer to the point of economically and hydrologically inefficient level. Inefficient water extraction is characterized as open- loop (path strategy) and feedback (strategic decision rules) equilibria. The empirical application shows that the effect of strategic behavior (i.e., reciprocal externality) is minimal for the study basin, and that the better part of the inefficiency arises from the path strategy (i.e., pumping cost externality). The alternative policies for encouraging more socially efficient behavior are simulated and discussed. Incentive-based policies such as water tax and electricity surcharges seem to offer more economically efficient and ecologically sustainable outcome.