Abstract
Market-based instruments pose widely prescribed but rarely implemented tools to manage scarce water resources. We estimate the price elasticity of demand for agricultural groundwater in a water district with volumetric pricing and monthly well-level extraction data spanning 17 years. Demand is inelastic, with estimates ranging from −0.16 to −0.2. We apply this parameter to calculate the surplus change from the introduction of agricultural water pricing, and the prospective gains from water transfers between urban and agricultural users, with and without water supply curtailments. Relative to a water conservation mandate applied uniformly to all users, trading can substantially mitigate the costs of water scarcity.
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