Issues involved in groundwater withdrawals and pollution of the Ogallala: Evidence from West Texas

The existing body of economic research dealing with groundwater extraction seems to focus only on that problem itself and does not view the exploitation of the aquifer and the corresponding pollution problem as a joint resource issue. This research attempts to fill in this gap, with the main objective being to assess the economic tradeoffs involved in groundwater quantity and quality management by capturing the dynamic behavior of the stock of groundwater as well as the stock of pollutant over a twenty year time period. The study uses simulated data for the estimation of production functions and nitrogen percolation functions and those estimates are used in a dynamic optimization framework to find out the level of water and nitrogen fertilizer applied per acre that maximizes net present value over a twenty year planning horizon. The research concludes with a proposed agent based trading scenario on the lines of Vernon Smith's water deeds approach where two agents using the same inputs for production are allowed to trade after allocation of an initial set of permits for water withdrawal. The impact on the level and quality of water as well as the individual net revenues turns out to be superior when compared to a purely myopic policy of extracting as much of the inputs as possible.