The Importance of Well Yield in Groundwater Demand Specification

The implementation of effective resource management policies critically depends on accurate estimates of the price elasticity of resource demand. In the case of groundwater, previous research estimating well-level groundwater demand has largely ignored the importance of well yield, which is a physical limit on the rate of groundwater extraction. In this research, we empirically estimate the price elasticity of demand for groundwater using well-level data from Colorado. Our results demonstrate that when well yield is omitted, price elasticity is overestimated. This in turn creates inaccurate predictions of the effect of price-based conservation policies on groundwater use and welfare impacts.