Accounting for well capacity in the economic decision making of groundwater users

Water conflicts unfolding around the world present the need for accurate economic models of groundwater use which couple traditional producer theory with hydrological science. We present a static optimization problem of individual producer rents, given groundwater as a variable input to production. In a break with previous literature, the model allows for the possibility of binding constraints on well capacity which occur due to the finite lateral speed at which water can move underground. The theoretical model predicts that when well yield constraints bind, producers maximize profit by extracting as much water as possible. Therefore, if producers are constrained, regions with more available water should consume more of it. We test this hypothesis empirically by modelling the effect of well yields on crop cover and water usage data. Our empirical results reveal that areas with higher average well capacities tend to plant a more water intensive mix of crops, and use more groundwater. This straightforward result comes in contrast to previous economic models of groundwater use, which have assumed an interior solution to the irrigators’ profit maximization problem. This research provides important inroads to understanding what really drives irrigators’ behavior on the High Plains; a crucial step towards conserving this precious resource.