Optimal groundwater use and dryland adoption utilizing the hotelling framework in the southern high plains
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Interest in nonrenewable resources has ignited numerous economic and public policy debates on long-term sustainability issues. On the Southern High Plains (SHP), functionally nonrenewable groundwater for agricultural irrigation has received significant attention given the central role of the agricultural sector to the regional economy. Current policies center on conservation, which is not equivalent to a policy of sustainability. Currently irrigation restrictions are being implemented under the so-called 50/50 Management Goal for the SHP where 50 percent of the saturated thickness of the Southern Ogallala Aquifer will be maintained in 50 years. This evades the central issue and causes several unintended consequences that interfere with true overall economic stability in the long run. Over draft of the aquifer is inevitable. Recharge cannot support even minimal levels of pumping for agriculture. So from an agricultural and economic perspective, the economic centrality of irrigated agriculture to the local economy which cannot be sustained classifies the Ogallala as a nonrenewable resource. This work then treats aquifer management directly as a nonrenewing resource and looks to the Hotelling nonrenewable resource model adapted to the SHP conditions. Groundwater research in the SHP has increasingly focused on the relevance of long-term issues. With a few exceptions, studies that have modeled the SHP aquifer decline tend to use the conventions to pre-set the planning period, thereby fixing a final groundwater target exogenously at some period. Targets may be a 50/50 Management Goal or depletion of the aquifer at a set, pre-fixed time. However, these modeling conveniences do not endogenize the terminal and transition period out of irrigated agriculture to other systems, such as dryland farming or other renewable energy systems. A pre-fixed end date used to compare policies misses many of the responses of producers and thereby over-estimates or under-estimates the long run impacts of a policy, such as the 50/50 rule. In this study, we develop a simple and surprisingly tractable behavioral model under certainty and with some attention to risk on groundwater utilization in the SHP. This groundwater model retains the main features of the Hotelling framework: that producers will consider the economic effects of the last quantities of applied irrigation today on the profitability of irrigation tomorrow, and producers try to balance these economic trade-offs. What is perhaps surprising is that the assumed decision process is a lot less complex than more standard or classical exemplars of the Hotelling framework. Guided by the Hotelling insight, we model economic decisions that fully endogenize the terminal period for irrigated agriculture (the time period when producers choose to discontinue irrigation applications). We use this decision rule to conduct policy analysis on irrigated agriculture conversion to evaluate several social outcomes of interest: timing of abandonment of irrigated agriculture, welfare of farmers today and in the future, and groundwater levels remaining after transition. Finally, we evaluate by illustration the benefits of specific timetables for research and development to increase dryland profitability as a direct sustainability program rather than the current conservation focus, an alternative public program that takes non-renewability seriously. Evaluation of a groundwater use restriction shows that the objective of water conservation is clearly attained in terms of water left in the aquifer on transition; but at the expense of welfare of producers in the future. This is because the restriction does not retain producers in irrigated agriculture longer but the reduced income induces producers to leave sooner, experiencing not a ‘soft’ transition but a much more disruptive and abrupt economic decline. Restrictions abbreviate rather than extend irrigated agriculture. Compared to the optimal groundwater use of producers operating under market conditions, the potential loss in incomes has the greatest adverse impact in the long-run on farmers that have lower levels of initial groundwater stock. So a restriction policy mostly injures the worst off farmers in terms of water stocks i.e. initial saturated thickness overlying their land. Results also show that providing a more profitable dryland alternative early on mitigates the adverse economic and economic and long run social disruption of a restriction policy over time. An example of a modest research and development strategy reveals that farmers will do far better with dryland research that commences immediately; the sooner they know or form expectations with regard to clear and more tangible outcomes of research and development, the more stable is their economic performance. Research and development discoveries that arrive in a ‘just in time’ fashion for transition are shown to be far less effective since it arrives too late to stabilize the regional economic activity. This study has ramifications on policy formulation in the future for managing groundwater resources such as questions on continuing irrigation and water use efficiency as a conservation policy or pursuing more aggressive dryland research as a direct sustainability policy for the nonrenewable groundwater resource. These are important aspects to consider in the long-run given that agriculture is a pivotal industry here in the SHP and the sense of urgency in current policy debates and allocation of resources towards these policies.