The main objective of the paper is to estimate the costs of groundwater over exploitation and examine the costs and benefits from groundwater replenishing mechanisms in different ecological contexts. Using the public good and externalities framework, the study shows how groundwater exploitation in Andhra Pradesh, India is resulting in economic losses to individual farmers apart from ecological degradation. It is argued that policies towards strengthening the resource base (replenishment mechanisms) and equitable distribution of the resource (property rights) would be beneficial, economically as well as ecologically.

The analysis is in favour of investment in replenishment mechanisms such as irrigation tanks and percolation tanks. The situation of over extraction and the resultant environmental degradation is a consequence of lack of appropriate and adequate policies (policy failure) for managing the subsurface water resources. Hitherto, groundwater policies (subsidized credit, power, etc.) are in the nature of encouraging private initiatives in groundwater development. It is argued that community-based investments in replenishment as well as extraction of groundwater would make better economic as well as ecological sense.