Verlag:
National Bureau of Economic Research, Cambridge, Mass
Groundwater is a key resource for agricultural production globally. Increasingly rapid aquifer drawdowns--as well as the policies intended to increase their sustainability--increase costs to agricultural producers, with unknown consequences. This...
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ZBW - Leibniz-Informationszentrum Wirtschaft, Standort Kiel
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Groundwater is a key resource for agricultural production globally. Increasingly rapid aquifer drawdowns--as well as the policies intended to increase their sustainability--increase costs to agricultural producers, with unknown consequences. This paper provides the first large-scale empirical estimates of how farmers respond to changes in groundwater costs in one of the world's most valuable agricultural areas: California. Using rich administrative data and exogenous variation in the price of electricity, a key input into groundwater extraction, we find that farmers are very price responsive: we estimate large price elasticities of demand for electricity (-1.17) and groundwater (-1.12). We demonstrate that crop switching and fallowing are the main channel through which farmers respond to increases in groundwater costs. Using a static discrete choice model, we estimate that a counterfactual $10 per-acre-foot groundwater tax--a level consistent with California's sustainability targets--would lead farmers to reallocate 3.9 percent of cropland, with increases in fallowing and high-value fruit and nut perennials, and decreases in annual crops and low-value perennials
