Valuing Groundwater Recharge in an Urban Context

Urbanization often creates waterrelated externalities such as increased flooding and decreased groundwater recharge. Decreased recharge can lead to the diminution of potentially valuable groundwater. Groundwater’s ability to buffer water-supply shocks may be a substantial component of the value of groundwater stock. I argue that in urban contexts, autoregressive rather than i.i.d. stochastic processes are a better characterization of water supply processes. Data for the Los Angeles area suggests that an autoregressive process is a better approximation of water supply processes than alternative processes and produces economically and statistically significantly different estimates of buffer and groundwater stock values. (JEL Q25, Q32)