Economically optimal groundwater extraction allocates water over space and time to its highest and best social use. But optimal management of water resources also requires optimal investment in watershed capital, even as the climate is changing. We augment a standard coastal groundwater management model with stock-dependent extraction costs to include recharge-enhancing natural and produced capital whose depreciation can be offset by investment in each period. In some parts of the world, including Hawai‘i, results from climate models suggest that mean annual rainfall will decrease but that the frequency of storms may increase. Accordingly, the groundwater-extraction/watershed-investment problem is further extended to allow natural recharge to decline in response to climate change.
