Economic Allocation of Groundwater (pt. 2)


Having seen a non-market economy, I suddenly understood much better what I liked about a market economy– Esther Dyson

The debate between the free market and the “planned” (aka command and control) approach to governance is an old one. Recently, with the emergence of ‘water markets’, it has become relevant in the context of water resources management.

In my current research, I am assessing the relative performances of these two approaches for groundwater management, in terms of the tradeoff between economic benefit and environmental degradation. For our purposes, we define water markets as a system of formal rules and regulations that govern the buying, selling and leasing of water use rights, traded independent of land titles.

Previous research1 has shown that optimal water markets (i.e. incentives-based policy) outperforms the command and control approach to groundwater management with regards to both economic and environmental outcomes. An optimal water market assumes perfect knowledge of hydrology, and optimizes the water use on a system-wide level to achieve maximum economic benefits.

In reality, however, perfection is hard to achieve. In my research, I’m interested to know how realistic water markets perform compared to uniform water quotas. We want to see whether the advantages of a water market over water quotas hold when there is no central planner with perfect foresight of the future and each farmer acts in his or her own interest.

Here is a quick overview of our modeling framework. In the farmer decision model, each “agent” represents a farmer/group of farmers, with varying levels of water productivity and land size. We have 50 agents in total who buy and sell groundwater permits with each other. The farmers can grow either crop or soy. At the start of the growing season, each of these agents makes a decision based on the land and water constraints on how much water to pump. The farmer decision model is connected to the physically based groundwater model that evaluates the impact of human actions on the natural system. We use a calibrated MODFLOW model developed by the Republican River Compact Authority, which operates on a monthly time step. It incorporates streamflow, precipitation and evaporation recharge and provides head of groundwater in response to groundwater pumping.

We use the Frenchman Creek Basin, a sub-watershed of Republican River spanning the states of Colorado and Nebraska, as a case study. This area is part of the Ogallala aquifer and has seen a tremendous increase in groundwater pumping in recent years. This has led to a dramatic water decline leading to states implementing regulations on groundwater withdrawals, including implementing groundwater quotas (a command and control approach). We want to know whether there is a better approach to ensure sustainable groundwater use.

In the next post, I’ll share some results from our analysis of the performance of groundwater markets. Stay tuned!

  1. Mulligan et al (2014), Assessing groundwater policy with coupled economic-groundwater hydrologic modeling, Water Resour. Res., 50(3)


Hassaan F. Khan is a PhD Candidate in the Hydrosystems Research Group.  You can find him on Twitter @hasfkhan.