Fiona Burlig, Louis Preonas, and Matt Woerman

Groundwater is a key resource for agricultural production globally. Both increasingly rapid drawdowns of aquifers as well the policies intended to increase aquifer sustainability increase costs to agricultural producers, with unknown consequences. In this paper, we provide the first large-scale empirical estimates of how farmers respond to changes in groundwater costs in one of the world’s most valuable agricultural areas: California. To do this, we assemble a novel dataset that combines (i) detailed restricted-access microdata on farmers’ electricity consumption, (ii) rich data from technical audits of these farmers’ pump efficiencies, (iii) measurements of groundwater depths in California aquifers, and (iv) satellite-derived measures of crop cover. For identification, we leverage exogenous variation in the price of electricity, a key marginal input into the groundwater production function. We find that farmers are very price responsive: we estimate large price elasticities of demand for electricity (1.17) and groundwater (1.12). We demonstrate that crop switching and fallowing are the main channel through which farmers respond to increases in groundwater costs. Using a discrete choice model, we estimate that a counterfactual $10 per-acre-foot groundwater tax—approximately the price increase required to meet California’s sustainability targets—would lead farmers to reallocate 8 percent of cropland, with increases in fallowing and high-value fruit and nut perennials, and decreases in annual crops and low-value perennials.

Areas of Focus: Energy Markets
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Energy Markets
Well-functioning markets are essential for providing access to reliable, affordable energy. EPIC research is uncovering the policies, prices and information needed to help energy markets work efficiently.
Electric Power
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Electric Power
As the electric power system faces new pressures and opportunities, EPIC research is working to identify the mix of policies needed to accelerate the global transition to clean, reliable, affordable...
Environment
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Environment
Producing and using energy damages people’s health and the environment. EPIC research is quantifying the social costs of energy choices and uncovering policies that help protect health while facilitating growth.
Conservation Economics
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Conservation Economics
Human society profoundly shapes – and is shaped by – the natural world. EPIC research is helping to identify the costs and benefits of preserving natural ecosystems.