A basic problem here is that a lot is that a lot is unknown. - the history of the well water production,, new users of water in the vicinity, any changes to the landscape in the vicinity which actually could be up many miles away which lends itself to the geology of the area, precipitation, its age which lends itself to silt accumulation and depth of the well.
Wells depend upon the water table.
Stated,
Reiten said:
Since the well is producing and keeping water the only logical conclusion is a leak in the pipe.
That's not the only conclusion.
You don't say what happened when you closed the tap at the bottom of the hill for 2 hours.
Did the well begin filling up in this case? At the same rate then no leak.
I am assuming when you say you plugged the "outlet", you are calling the end of the pipe in the well as the "outlet" of the well.
Some other considerations you might want to think about.
It also could be that the well itself could not be itself anymore and is starting to dry up for a number of the reasons.
New users will drop the water table and that means less head for this well.
Changes to the landscape may mean the water underground is not being replenished.
Lower precipitation would also mean less replenishment of the underground water.
Silt accumulation is preventing the well to be adequately filled after use - the well may need a cleaning out.
Reiten said:
The wells water level rose by 10 cm in ~2h
Is that as high as the water level in the well will ever get if you wait longer?
What's the level after 4 hours? a day?
The flow is not all that bad if you had several meters of head in the well and you are not filling swimming pools, but sharing with a neighbor then a couple of sessions of washing dishes and the well is done for the time being.
You have checked the flow rate into the well already - that's good, no money spent, just gathering information.
The next to do is to check the maximum height the water reaches within the well and gather that information and again no money spent. Converse with your neighbour on a good time to shut down flow for a good whole day, so both of you get a chance to plan ahead. After a day, take a reading, or take intermittent readings every 4 hours or so to make a graph. ( On the sides of the well there may be seen faint water marks of past history of well water height.) That should give an idea of the draw that is available per day for both you and your neighbor before the well is done. Does the available draw fall short, match or exceed what you estimate each household would use per day?
As an addition, another way to check for a leak is to minimally ( say 10 psi ) pressurize the pipe and see if the pressure stays or drops after a length of time. Turn off the tap at the bottom of the hill, just add a length of vertical pipe to the "outlet" of the well with a no leak connection, fill the pipe up with water, and watch what happens may be enough. No drop in the pipe = no leak.