The full economic cost of groundwater extraction

Jon Strand

No 5494, Policy Research Working Paper Series from The World Bank

Abstract: When a groundwater basin is exploited by a large number of farmers, acting independently, each farmer has little incentive to practice conservation that would primarily benefit other farmers. This can lead to excessive groundwater extraction. When farmers pay less than the full cost of electricity used for groundwater pumping, this problem can be worsened; while the problem can be somewhat relieved by rationing the electricity supply. The research in this paper constructs an analytical framework for describing the characteristics of economically efficient groundwater management plans, identifying how individual water use decisions by farmers collectively depart from efficient resource use, and examining how policies related to both water and electricity can improve on the efficiency of the status quo. It is shown that an optimal scheme for pricing electricity used for pumping groundwater includes two main elements: 1) the full (marginal) economic cost of electricity must be covered; and 2) there must be an extra charge, reflected in the electricity price, corresponding to the externality cost of groundwater pumping. The analysis includes a methodology for calculating the latter externality cost, based on just a few parameters, and a discussion of how electricity pricing could be modified to improve efficiency in both power and water use.

Keywords: Water and Industry; Water Supply and Systems; Water Conservation; Water Use; Wastewater Treatment (search for similar items in EconPapers)
Date: 2010-12-01
New Economics Papers: this item is included in nep-agr and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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