Groundwater pumping contributes significantly to land subsidence, which generates economic costs as changes in the frequency of flooding affect property values. We evaluate these costs by estimating the marginal damages from pumping, which define the corrective policy incentive to address land subsidence externalities. In an application to the southern Chesapeake Bay region of Virginia, we find that land subsidence due to groundwater pumping is greatest in inland rural areas, but that the damages from pumping are greatest in coastal urban areas. Our results suggest that cost-minimizing groundwater policy is spatially heterogeneous and targets the damages from land subsidence due to pumping in different locations, not simply physical land subsidence itself. These results are driven by differences in the spatial patterns of aquifer characteristics, which determine subsidence, and housing density, which determines the damages from subsidence.
