Economic Aspects of Groundwater Withdrawal Permit Transfers

Abstract

The economic properties of three different permitting options for regulating ground‐water withdrawals are estimated by computer simulation of the economic return for irrigation of corn. The three regulatory options consist of withdrawal limitations in the form of ground‐water pumping permits allocated in proportion to overlaying land area with: (1) No trading of permits; (2) trading of long‐term (over years) permits; and (3) trading of both long‐ and short‐term (within year) permits. Seven scenarios representing different combinations of regulations and weather and crop‐yield predictability are simulated for farm plots in heavily irrigated areas of Kankakee and Mason counties, Illinois. Alternative assumptions regarding weather predictability are: (1) No knowledge at all; (2) complete knowledge of future weather and accurate crop‐yield modeling (i.e., response to weather conditions and quantity of applied irrigation water); and (3) knowledge of past weather and accurate crop‐yield modeling, but no knowledge of future weather. The results indicate that a considerable increase in economic efficiency may be realized from long‐term permit trading and improving the accuracy of weather and crop‐yield forecasting. The value of long‐term permit trading is found to diminish in the presence of accurate crop‐yield forecasting and is smaller yet if accurate weather prediction is available as well.