Groundwater is a common-pool resource essential for agricultural production. Groundwater tends to be unpriced and weakly regulated, and this lack of efficient pricing impacts welfare through multiple channels. One such channel is spatial externalities: when farmers extract a marginal unit of groundwater, this lowers nearby water levels and increases their neighbors’ pumping costs. Another prominent channel is crop misallocation: farmers may plant low-value, water-intensive crops on high-value land. This paper estimates farmers’ demand for groundwater—an essential input for evaluating these welfare losses and for predicting counterfactuals under groundwater management policies. We assemble a novel dataset that combines (i) detailed microdata on farmers’ electricity consumption for groundwater pumping, (ii) rich data from technical audits of these farmers’ pump efficiencies, and (iii) publicly available measurements of groundwater depths in California aquifers. Using exogenous variation in electricity prices, we estimate farmers’ price elasticities of demand for both electricity (–1.17) and groundwater (–1.12) to be much larger than previous estimates in the literature. We then calculate the extent to which each farm lowers its neighbors’ economic surplus by removing water from their shared aquifer. Our preliminary results suggest that the magnitude of this “pumping cost” externality is likely smaller than farmers’ private costs of groundwater pumping.
Past Faculty Workshop•May 21, 2019
Louis Preonas, University of Maryland
Spatial Externalities in Groundwater Extraction: Evidence from California Agriculture (with Fiona Burlig and Matt Woerman)