Revisiting the Economic Value of Groundwater

This paper revisits the theoretical framework of computing the economic value of groundwater in a dynamic context. Specifically, we prove that an additional type of economic value exists, that is, the dynamic reallocation value (DRV), which has been overlooked in existing studies, and we propose a new construction of the total economic value of groundwater with social implications for the role of groundwater in climate adaptation. We examine the existence of this new value and its underlying behavioural mechanism using a simple two-stage model, and then generalise the specification to a dynamic model with an arbitrary number of stages. We find that behind the positive values of DRV, users intentionally destabilize total water use by amplifying their reactions against surface water fluctuations and still realize a higher total expected benefit than in the case without uncertainty. We show that this behaviour is an intertemporal reallocation of groundwater intake against changes in intertemporal cost allocations caused by the users’ stabilizing behaviours. Disregarding the DRV underestimates the economic value of groundwater as an essential instrument for climate adaptation.