Planning versus competitive rates of groundwater pumping

Groundwater pumping from a common property aquifer leads to pumping cost externalities which imply a divergence between competitive and socially optimal rates of groundwater pumping. Gisser and Sanchez (1980) show in a specific context that this qualitative distinction is quantitatively negligible. However, this result seems to defy the common consensus that in many aquifers, depletion will occur prematurely. Given these observations, serious questions arise concerning the role and scope of water management policy. We further explore this issue under alternative hydrologic/economic hypotheses and note scenarios under which divergence of competitive and socially optimal rates of water pumping is significant. We find that divergence increases with demand growth, declining well yields, and low social discount rates. The role and scope of policy are then inferred.