Abstract
The objective of this study is to provide estimates of price elasticities of irrigation water demands in Zhangye Basin (ZB), an inland river basin in China, with the most recent data and to compare the values of marginal product (VMPs) of water to the prices of water farmers are currently paying. With a set of village and household survey data collected in 2009 and 2014, household fixed effects models are used to estimate water demand and crop production functions. The estimation results are then used to estimate price elasticities and VMPs. Results show that demands for surface water, groundwater, and conjunctive irrigation water are all in the inelastic range. The results imply that water prices may need to be increased significantly to induce sizable water savings. Another significant finding is that for a large share of the sample households, VMPs of water are higher than the prices of water. The estimated VMPs provide policy makers with some guidelines on the minimum level of water prices required to achieve any water savings among those households.
Highlights
Agriculture is the largest user of water in many parts of the world [1]
This study estimates price elasticities of irrigation water demand and imputes economic returns of water using a set of plot levels in the midstream of Heihe River Basin (HRB)
The economic returns of irrigation water are defined as the value of marginal product (VMP) of irrigation water in crop production
Summary
Agriculture is the largest user of water in many parts of the world [1]. This is true in inland river basins where agriculture faces less competition for water from industry or residential sectors due to a lower degree of industrialization and a smaller population. Using household cross section data from ZB, Zhou et al [28] estimated the price elasticity of irrigation water demand was about −0.55. Huang et al [4] find that some farmers in Hebei province, located in north China, face a gap between the cost of groundwater they pay and the value of groundwater The latter is measured as the increment in crop income if one more unit of groundwater were available. Using a bio-economic model and simulations, Shi et al [42] have found farmers’ irrigation water demand is not sensitive to changes in water price, because the shadow price of agricultural water is much higher than the cost of water farmers are paying. This study is among the very few that provides crop-specific empirical estimates of values of irrigation water using household survey data.
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