Responding to a Groundwater Crisis: The Effects of Self-Imposed Economic Incentives

Steven Smith, Krister Andersson, Kelsey C. Cody, Michael Cox and Darren Ficklin

Journal of the Association of Environmental and Resource Economists, 2017, vol. 4, issue 4, 985 - 1023

Abstract: Many globally important groundwater aquifers are under considerable stress as withdrawals, predominantly for irrigation, outpace recharge. Meanwhile, groundwater policy to address the common-pool resource losses remains in its nascent stage. This study analyzes a recent and unique bottom-up effort to self-impose a groundwater pumping fee in San Luis Valley, Colorado. Utilizing a difference-in-difference econometric framework, our results bring new and direct empirical evidence to the debate on the use of economic incentives in groundwater policy. We find that the price intervention has been effective, leading to a 33% reduction in groundwater use, predominantly through reduced irrigation intensity. We also find, to a more limited extent, movement away from water-thirsty crops and reduced overall irrigated acreage. Given that financial incentives can produce substantial conservation within a groundwater commons in duress, price-based policies warrant further consideration as irrigators address diminishing and variable water supplies.

Date: 2017
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