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Economics of Water

Paper Session

Saturday, Jan. 4, 2020 10:15 AM - 12:15 PM (PDT)

Manchester Grand Hyatt, Gaslamp D
Hosted By: Association of Environmental and Resource Economists
  • Chair: Olivier Deschenes, University of California-Santa Barbara

Water Trade in General Equilibrium: Theory and Evidence

Muyang Ge
,
Nanjing Audit University
Eric Edwards
,
North Carolina State University
Reza Oladi
,
Utah State University
Sherzod Akhundjanov
,
Utah State University

Abstract

In arid regions, rural-to-urban water markets can reduce shortfalls among high-value urban consumers by
allowing irrigators to voluntarily reduce production and sell conserved water. Such sales have been
criticized for reducing economic activity and the availability of water for ecosystem services in the
originating region. However, there are few studies examining the theoretical rationale for such an
argument against water markets, or testing it empirically. In this study, we examine the impact of a 2003
agreement in California to transfer water primarily from the Imperial Irrigation District to San Diego
County, a sale billed as the largest agriculture-to-urban water transfer in US history. We develop a basic
general equilibrium representation of a hydrologic-ecological-economic system to explore the theoretical
effect of this trade on the economy of the water exporting region. The model predicts increases in the
value of water and a decrease in employment, in both high- and low-skill sectors. We test these
predictions using data on agricultural labor and production in Imperial County before and after the
agreement using a synthetic counterfactual constructed using California counties. Post-2003, the
divergence in crop acreage and agricultural production between Imperial County and the control closely
resembles the acreage reduction requirements of the water transfers. The effect also appears in the
agricultural labor market, where we show a decline in the number of both high- and low-skill
employment. Increased crop yields relative to the control also indicate higher water value in Imperial
County in the post-trade period. The increase in value intensified water use, and we document how
greater efficiency by irrigators has decreased flows into the nearby Salton Sea, leading to corresponding
declines in ecosystem services, especially habitat for migratory birds. We conclude with a discussion of
the magnitude of these costs relative to the gains from water trade.

Water Market Dynamics in the Presence of Environmental Variability

Andrew Ayres
,
Public Policy Institute of California
Renato Molina
,
University of Miami

Abstract

The challenges associated with effectively managing water resources are highly salient in arid regions of the world. Water markets have been promoted as an efficient solution, and the foundational requirement for such an approach – a system of comparatively well-defined, tradable property rights – has emerged in some particularly water-stressed areas. Yet, comprehensive, data-driven empirical assessments of water markets’ effectiveness in promoting timely reallocation remain scarce. In this paper, we explore whether environmental shocks spur market transactions and also study how public subsidies play a role in these dynamics. We compile a unique dataset that accounts for all recorded water right transactions, all subsidies for water use efficiency, as well as precipitation and temperature patterns in Chile from 1979 to present. Our panel dataset enables estimation of the impacts of both persistent environmental shocks (i.e., droughts) and government subsidies at sub-national scale. We provide evidence on water market performance in the face of environmental variability, as well as the nation-wide effects of government subsidies for irrigation technology on exchange.

Agricultural Adaptation to Water Pricing

Ellen Marie Bruno
,
University of California-Berkeley
Katrina Jessoe
,
University of California-Davis
Michael Hanemann
,
Arizona State University

Abstract

The introduction of pricing for agricultural water may correct consumption externalities, and induce water-saving technological change. This paper evaluates the effect of water prices on water and land use to understand the role that prices can play in adapting to increased water scarcity. We exploit farm-level panel data on groundwater use in an agricultural region that charges volumetric prices for groundwater to estimate the short-run effects of prices on groundwater use. We then use high resolution panel data on farm-level land use to estimate the impact of prices on crop choice, fallowing, and land conversion. We find evidence that a large increase in water prices leads to significant resource reallocation: farmers responded to a 31% increase in prices with a 27% decrease in overall groundwater extraction, a 16% decrease in irrigated agriculture, and a 23% decrease in total agricultural land. Pricing agricultural water to reflect marginal social costs will lead to water conservation and changes in agricultural acreage.

Historical Evidence of Increased Climatic Resiliency due to Irrigation in the United States

Steven M. Smith
,
Colorado School of Mines
Eric Edwards
,
North Carolina State University

Abstract

We consider how technological innovation impacts climate resiliency in the context of agricultural production and irrigation in the United States, where irrigated cropland now accounts for nearly half of production. During the 1940s stored water for irrigation become more widely available: surface water through large dams and associated irrigation works, and groundwater through rural electrification and center-pivot sprinkler technology. In this paper we hold constant overall productivity increases in the arid US west to understand the role irrigation technology has played in mitigating climatic shocks. Characterizing significant drought as county precipitation at least 1.5 standard deviations below normal, we examine relative changes in agricultural production in counties with access to water storage. Prior to 1950, a county having a severe drought saw a 20-30% decrease in the value of crop production. After 1950, counties without increased access to stored water, ground or surface, saw a 24% decrease in crop value, whereas counties with storage experience no loss, on average. The resilience stems largely from areas with groundwater access, where farmers are able to increase irrigated acreage during drier conditions. Our findings suggest that expanded storage mitigates climatic shocks, providing benefits that are additional to a county’s average irrigation productivity increase. These patterns are important to understand as we document that even the more humid eastern counties are increasingly investing in irrigation and demonstrate similar abilities to increase irrigated acreage during droughts.
Discussant(s)
David Sunding
,
University of California-Berkeley
Sheila Olmstead
,
University of Texas
Yusuke Kuwayama
,
Resources for the Future
Olivier Deschenes
,
University of California-Santa Barbara
JEL Classifications
  • Q2 - Renewable Resources and Conservation
  • Q3 - Nonrenewable Resources and Conservation