The present paper studies the effects of alternative modifications of a subsidy for electricity used to pump groundwater on the behavior of profit maximizing groundwater users. It proposes a stylized model for groundwater extraction, and then numerically derives general results by simulation. The model is applied to aquifers in Leon, Guanajuato, Mexico and Kern County, California. The performance of two traditional policy intervention measures-subsidy elimination and reduction-are compared to a new, innovative modification policy, namely, decoupling the subsidy from the electricity bill; this policy is arguably more politically acceptable. The results of extensive simulations suggest that the rate of aquifer water extraction, and the consequent level of water in the aquifer, can be improved significantly by changing the subsidy structure.
Previous workThere is a large body of literature concerning groundwater
a b s t r a c tPervasive energy subsidies for groundwater pumping pose a challenge to policy makers around the world, who have to cope with lower water tables due to increased reliance on groundwater resources for irrigation. The present paper outlines a laboratory experiment aimed to study the groundwater extraction decisions of stakeholders under alternative subsidy structures. We propose a model and a methodology for testing the implications of the model and the modifications of energy subsidies for irrigation. We analyze the performance of two traditional policy interventions-elimination and reduction of subsidy-and then analyze a novel policy: decoupling the subsidy from the electricity rate by replacing it with a lump sum transfer. Our results suggest that the rate of water extraction and the level of water in the aquifer may significantly be improved by altering the subsidy structure. An important finding for policy makers is that the decoupling leads to outcomes similar to those of eliminating the subsidy, however, with fewer political economy conflicts. (E. Tellez Foster).
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