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The full economic cost of groundwater extraction

  • Strand, Jon

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.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5494.

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Date of creation: 01 Dec 2010
Date of revision:
Handle: RePEc:wbk:wbrwps:5494
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  1. Provencher Bill & Burt Oscar, 1993. "The Externalities Associated with the Common Property Exploitation of Groundwater," Journal of Environmental Economics and Management, Elsevier, vol. 24(2), pages 139-158, March.
  2. Tsur, Yacov & Graham-Tomasi, Theodore, 1991. "The buffer value of groundwater with stochastic surface water supplies," Journal of Environmental Economics and Management, Elsevier, vol. 21(3), pages 201-224, November.
  3. Santiago Rubio & BegoƱa Casino, 2003. "Strategic Behavior and Efficiency in the Common Property Extraction of Groundwater," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 26(1), pages 73-87, September.
  4. Tsur Yacov & Zemel Amos, 1995. "Uncertainty and Irreversibility in Groundwater Resource Management," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 149-161, September.
  5. Birner, Regina & Gupta, Surupa & Sharma, Neeru, 2011. "The political economy of agricultural policy reform in India: Fertilizers and electricity for irrigation," Research reports reginabirner, International Food Policy Research Institute (IFPRI).
  6. Stergios Athanassoglou & Glenn Sheriff & Tobias Siegfried & Woonghee Tim Huh, 2009. "Simple Mechanisms for Managing Complex Aquifers," NCEE Working Paper Series 200905, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Oct 2009.
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