Abstract
This paper revisits the theoretical framework of computing the economic
value of groundwater in a dynamic context. Specifically, we prove that
an additional type of economic value exists, that is, the dynamic
reallocation value (DRV), which has been overlooked in existing studies,
and we propose a new construction of the total economic value of
groundwater with social implications for the role of groundwater in
climate adaptation. We examine the existence of this new value and its
underlying behavioural mechanism using a simple two-stage model, and
then generalise the specification to a dynamic model with an arbitrary
number of stages. We find that behind the positive values of DRV, users
intentionally destabilize total water use by amplifying their reactions
against surface water fluctuations and still realize a higher total
expected benefit than in the case without uncertainty. We show that this
behaviour is an intertemporal reallocation of groundwater intake against
changes in intertemporal cost allocations caused by the users’
stabilizing behaviours. Disregarding the DRV underestimates the economic
value of groundwater as an essential instrument for climate adaptation.