On the Economics of Optimal Urban Groundwater Management in the Desert Southwest

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Climate change and population growth anticipate the need for efficient, sustainable, long-term groundwater management. Groundwater serves as the primary water source for approximately 80 percent of public water systems in the United States and for many more as a secondary source. Traditionally management relies on groundwater to meet rising demand by increasing supply, but climate uncertainty and population growth require more judicious management to achieve efficiency and sustainability. Over pumping leads to groundwater overdraft and jeopardizes the ability of future users to depend on the resource. Optimal urban groundwater pumping is a solution to this conundrum. This paper investigates to what extent and under what circumstances optimally controlled groundwater pumping improves social welfare. It considers management in a hydro-economic framework and finds the optimal pumping path and the optimal price path. These enable the paper to identify the social benefit of controlled pumping and the scarcity rent, a tool to sustainably manage groundwater resources. The paper numerically illustrates the model with Albuquerque, New Mexico as the case study. The Albuquerque results indicate that, in the presence of strong demand growth, controlled pumping improves social welfare by 22 percent, lengthens the resource, and provides planners a mechanism to achieve water sustainability.