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Allocative inefficiencies resulting from subsidies to agricultural electricity use : an illustrative model

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  • Strand, Jon

Abstract

This paper provides an analytical discussion of several interconnected resource allocation problems from under-pricing of electricity used by farmers for groundwater extraction. In these situations, groundwater extraction is inefficiently high even without electricity under-pricing. Moreover, part of the electric power supply intended for farmers is often diverted to other unauthorized uses (notably illicit consumption). The paper demonstrates that unless non-price electricity rationing imposes severe constraints on demand, the range of resource allocation problems includes insufficient incentives to provide high-level service by the power utility, insufficient incentives for farmers to install and operate efficient equipment, and losses due to political"rent seeking"activities to influence water allocations. It also shows that diversion of electricity to illicit uses can increase overall economic efficiency when this leads to less electricity use by farmers, thus somewhat ameliorating the problem of excessive groundwater extraction as well as the inefficiencies related to under-pricing of electricity. Systemic reforms for overcoming these problems may face severe political obstacles.

Suggested Citation

  • Strand, Jon, 2012. "Allocative inefficiencies resulting from subsidies to agricultural electricity use : an illustrative model," Policy Research Working Paper Series 5955, The World Bank.
  • Handle: RePEc:wbk:wbrwps:5955
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    References listed on IDEAS

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    1. A. Banerji & J. V. Meenakshi & Gauri Khanna, "undated". "Groundwater Irrigation in North India: Institutions and Markets," Working papers 17, The South Asian Network for Development and Environmental Economics.
    2. Strand, Jon, 2012. "Low-level versus high-level equilibrium in public utility services," Journal of Public Economics, Elsevier, vol. 96(1), pages 163-172.
    3. Strand, Jon, 2010. "The full economic cost of groundwater extraction," Policy Research Working Paper Series 5494, The World Bank.
    4. M. Jahangir Alam, "undated". "Prevalence and Costs of Childhood Diarrhoea in the Slums of Dhaka," Working papers 46, The South Asian Network for Development and Environmental Economics.
    5. Pranab Bardhan & Dilip Mookherjee, 2006. "Decentralisation and Accountability in Infrastructure Delivery in Developing Countries," Economic Journal, Royal Economic Society, vol. 116(508), pages 101-127, January.
    6. 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).
    7. Shah, Tushaar & Molden, David J. & Sakthivadivel, Ramasamy & Seckler, David, 2000. "The global groundwater situation: overview of opportunities and challenges," IWMI Books, International Water Management Institute, number 113506.
    8. Reddy, V. Ratna, 2005. "Costs of resource depletion externalities: a study of groundwater overexploitation in Andhra Pradesh, India," Environment and Development Economics, Cambridge University Press, vol. 10(04), pages 533-556, August.
    9. Shah, T. & Molden, D. & Sakthivadivel, R. & Seckler, D., 2000. "The global groundwater situation: overview of opportunities and challenges," IWMI Books, Reports H025885, International Water Management Institute.
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    Keywords

    Energy Production and Transportation; Water and Industry; Economic Theory&Research; Wastewater Treatment; Electric Power;

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