Optimal Groundwater Use: Evidence from Nebraska

Abstract

The agricultural sector is the primary water consumer in the US. Groundwater is one of its main sources, with 65% of irrigated farmland relying on groundwater for its water supply. Groundwater use presents a common pool problem: if a farmer pumps groundwater, they decrease the aquifer’s water table and thus increase the cost of pumping for farmers in the same aquifer. Studying such a problem is challenging due to a lack of markets and data on groundwater use. In this paper, I leverage detailed farmer-level data on water use, crop choices, and crop yields to study the equilibrium implications of the current groundwater costs in Nebraska. To estimate the effect of water costs on water use and crop choices, I combine a crop-growth model with an economic model. I use the crop-growth model to recover the precise relation between water use and crop yields. I use the economic model to quantify how farmers respond to water costs by switching which crop they plant or changing the water use per planted crop. I find that farmers are inelastic to water costs. Moreover, I find that farmers adapt to higher water costs by reducing the water use per planted crop and fallowing the land. Lastly, I utilize my estimates to compute the farmers’ optimal tax on groundwater use.