This site gives you a pretty good description of shallow wells.
Single Line Jet Pumps & Water Wells, Explanation & Repair Advice
This quote is from that site: "If the foot valve is leaky and water runs back into the well we increase the wear on the water pump as it has to run more often, and pretty soon the water pump will lose its prime (water inside the pump mechanism) and it may be unable to retrieve any more water from the well whatsoever. "
The good news is, you are probably not looking at more than twenty or so of pipe. Not too bad to pull up if you have to. I would think you have to be looking at a faulty foot valve, which is essentially a checkvalve at the end of the one pipe going down. However, the fact that you see bubbles coming up into the impeller housing as the water drops might point to a leak in a pipe or pipe joint.