Industry Impacts of Pricing Pollution: Groundwater Externalities and Agricultural Land Use

• Agricultural Economics Workshop

Date and Location

Thursday, December 10, 2020, 4:10 PM - 5:30 PM
Online Meeting, Zoom

Abstract

Groundwater externalities pose a critical threat to the future availability of water supplies. This paper analyzes a volumetric pricing program that was implemented to address water quality and quantity externalities arising from groundwater irrigation. We use panel data on farm-level land and groundwater use to identify the short-run effects of this water pollution tax on groundwater use, crop choice, land fallowing, and land conversion. We find that farmers responded to an increase in prices with a 10-15% decrease in overall groundwater extraction and a 17% decrease in total agricultural land. Crop switching towards high-value crops also occurs. We provide empirical evidence that volumetric groundwater pricing can lead to significant resource reallocation, with movement out of agricultural production.