Rational pricing of groundwater with a growing population

Abstract

When population is increasing, characterizing the optimal water consumption path is complicated by the fact that the underlying dynamics of the water stock is contingent on the level of the stock itself. We propose a method of constructing the optimal path in this case. Since population is increasing, the optimal consumption path may involve refraining at times from consuming the totality of the surface water flow in order to restock in groundwater for future consumption. The aquifer then serves as a means to achieve welfare increasing intertemporal transfers of surface water. Therefore the aquifer itself, as distinct from the stock of water it serves to store, may have value and the marginal valuation of water when groundwater stocks are being drawn upon should, for this reason, differ at times from the marginal valuation of water when it is drawn strictly from surface water.