How stable is the stabilization value of groundwater? Examining the behavioral and physical determinants

In this paper we explore the economic value of groundwater in irrigation – both in terms of the way in which it stabilizes water supply for those facing uncertain surface water flows – as well as in the way it augments water supply to farming enterprises beyond what would be available from precipitation or surface water flows alone. These respective components of groundwater's economic value – its ‘stabilization’ and ‘augmentation’ value – have been discussed in the literature before, but we point out some important ways in which they could be diminished if sub-optimal groundwater abstraction is allowed to persist. Groundwater ‘mining’ tends to diminish the augmentation value of groundwater, while leaving the stabilization value unaffected – as long as the resource extraction only manifests itself in terms of increased pumping costs. We illustrate, however, a situation in which even the stabilization value can be attenuated – which arises when constraints to the user's ability to abstract groundwater become binding and prevent her from realizing the stabilizing value that is embodied in the immediate exploitation of the resource. We demonstrate these losses in groundwater's economic value in irrigation through simulating increasingly sub-optimal, non-cooperative and strategic groundwater pumping behavior in a way that has not been done explicitly in the literature, and use a well-studied example from California to give an empirical illustration of our points.