UC Davis Agricultural and Resource Economics

AAEA Presentation by Ellen M. Bruno: Agricultural Groundwater Markets: An Analysis of the Gains from Trade and the Role of Market Power

July 26, 2017

Advisor: Richard Sexton and Katrina Jessoe
Fields: Agricultural Economics, Environmental & Resource Economics, Applied Econometrics

Time: Tuesday, August 1st, 3:00 pm
Location: Ohio State

My research is about the use of economic instruments to manage groundwater. Groundwater is an important input for irrigated agriculture. It is either the sole water source for an irrigator or used in conjunction with surface water, where it serves as a buffer to variability in the surface water supply. In many groundwater basins worldwide, irrigators have pumped faster than the rate of replenishment, causing losses in groundwater storage over time. As a result, groundwater is facing increased regulation.

Groundwater cap and trade is one possible management strategy, but the potential impacts of this tool are not well understood. With an application to a groundwater basin in southern California, I develop a theoretical and simulation model of groundwater trading to estimate the gains from allowing trade. Within this framework, I show how the gains from trade change as market conditions and market structure vary. This work is coupled with on-going research empirically estimating the groundwater demand elasticity using monthly, well-level groundwater extraction and price data.

Market structure will be a key factor to consider when evaluating groundwater cap and trade. Market power may be a defining component of these local groundwater markets due to the presence of large grower-shippers and/or competition among a few water agencies on a shared basin. Simulation results based on linear groundwater demand curves show that gains from markets are large, despite losses from market power.


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