Optimal management of a confined groundwater system

Dynamic programming is applied to a relatively simple economic and hydrologic model of a confined aquifer system in Southwest Montana to determine an optimal interseasonal allocation schedule. The derived decision rule demonstrates the economic advantage of maintaining a confined groundwater system. While localized intraseasonal loss of the artesian pressure may occur, it is important to maintain this pressure from year to year because of its role in reducing extraction costs. The welfare gap, as measured by differences in the net present value of economic returns to the basin under an optimal use policy versus an uncontrolled, “common pool” situation, is not trivial. Sensitivity analysis indicates that assumptions about uniformity of land productivity, vis-à-vis their impact on the shape of the returns function, the discount rate, and the level of electric power rates are particularly critical with respect to the magnitude of the commonality problem.