This paper presents an optimal control model of integrated watershed management in the presence of a dam. Management efforts focus on upstream soil conservation, reservoir-level sediment removal, and downstream damage control from water pollution. Increased soil conservation potentially benefits farmers and also has the external benefit of reducing sediment accumulation in the reservoir. Sediment is released downstream of the reservoir using the hydrosuction sediment removal system (HSRS). This sediment release extends reservoir life and provides nutrients to downstream farmers who then use less fertilizer. Also included in the functions of the dam manager are the provision of water to downstream farms, the control of instream flow to mitigate downstream damages from water pollution, and the use of water treatment to meet quality standards for water supplied directly from the reservoir to residential users. An illustrative application of the model to Lake Aswan, located between Egypt and Sudan, indicates substantial benefits from far-sighted behavior and cooperation across all agents. Moving from the baseline case that reflects the status quo to the socially optimal solution increases watershed net present value by more than $500 billion. Other scenarios with varying types of collaboration among the agents are also explored. Interestingly, while decisions with respect to soil conservation do impact the welfare of upstream farmers, the benefits to reservoir management and agriculture in Egypt are modest compared to benefits Egypt gets from improved control of instream flow. Also, subject to technical limits, increasing reservoir life through practice of HSRS is economically desirable.
