The economics of optimal urban groundwater management in southwestern USA

Groundwater serves as the primary water source for approximately 80% 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 can play a role in solving this conundrum. This paper investigates to what extent and under what circumstances controlled pumping improves social welfare. It considers management in a hydro-economic framework and finds the optimal pumping path and the optimal price path. These allow for the identification of the social benefit of controlled pumping, and the scarcity rent, which is one tool to sustainably manage groundwater resources. The model is numerically illustrated with a case study from Albuquerque, New Mexico (USA). The Albuquerque results indicate that, in the presence of strong demand growth, controlled pumping improves social welfare by 22%, extends use of the resource, and provides planners with a mechanism to advance the economic sustainability of groundwater.