Economics of Groundwater Regulation

Regulations have economic effects. After all, most regulations are enacted to address an economic, environmental, or social failure emanating from the market. By their nature, regulations produce economic winners and losers. Groundwater regulations are no exception. A study by researchers at the University of Nebraska, the University of Minnesota, and the USDA Economic Research Service found evidence of this when it found groundwater regulations in Nebraska affected farmland values, but the effects were not statistically significant. In other words, the researchers could not rule out chance as the cause for the effects calculated.

Groundwater regulation in Nebraska began in 1979 with the implementation of allocations on the amount of water which could be pumped by the Upper Republican Natural Resources District (NRD). Since then, eight NRDs have enacted allocations and fifteen have implemented moratoriums on new wells (Figures 1 and 2). For the study, land transaction data was used to examine effects of regulations on land values and to explore whether different types of groundwater regulations—moratorium and allocations—resulted in different economic effects.  

FIGURE 3. NRDS WITH GROUNDWATER ALLOCATIONS

Source: Aakanksha Melkani et. al, Economic Impact of Groundwater Regulation in Nebraska: A Hedonic Price Analysis, AgEcon Search, 2023.

FIGURE 4. NRDS WITH WELL MORATORIUMS

Source: Aakanksha Melkani et. al, Economic Impact of Groundwater Regulation in Nebraska: A Hedonic Price Analysis, AgEcon Search, 2023.

Economic theory suggests groundwater regulations could be capitalized either positively or negatively into land values. The effects of well moratoriums on the value of irrigated or non-irrigated cropland are straight-forward. Relative to a world without a moratorium, values for land with wells should be higher while land without wells should be lower. The effects of allocations are less straight-forward. To the extent allocations limit usage, they could lower values. However, if allocations reduce overuse and prolong aquifer life, land values could be higher than they otherwise would be. In this study, the researchers found that moratoriums and allocations both have negative effects on farmland values, reducing values by 6.9 percent and 9.5 percent, respectively, compared to a control group. But again, the results were not statistically significant.

In many ways, NRDs are at the forefront of protecting the state’s groundwater resources. The regulations, though, have economic effects. This study examined the potential effects on land values. And while effects were found, the study was unable to make definitive conclusions. Still, the study provides further insight into the economic effects of groundwater regulation.