The Effect of Groundwater Allocation on Economic Welfare Loss

Water scarcity has become a constraint for regional economic development in many cities and regions. Water rationing serves as one instrument to constrain water consumption to persuade users to save water and to moderate their consumption. When the supply of water is unable to satisfy demand, a loss of welfare for the water users will usually occur. This paper conducts an empirical case study on a Chicago suburban county, McHenry County, to evaluate effective water allocation strategies under possible water scarcity scenarios, by specifically taking into consideration of the economic welfare loss under water rationing. It points out the inefficiency of equal rationing and tests a more effective optimal rationing regime which could significantly lower the overall welfare loss for McHenry County. Instead of a conventional watershed‐based approach that would provide little advantage for an area that mostly relies on groundwater, this study adopts regional planning/political boundaries as its spatial analytical units. The outcomes suggest that municipality‐level water resources management models, powered under economic welfare objective functions, are both possible and practical. The planning strategy drawn under such optimization models suggests a variety of promising approaches to manage groundwater resources at county scales.