The Dynamic Impacts of Pricing Groundwater

Abstract

This paper evaluates own-price dynamics in taxing environmental externalities. We exploit a natural experiment that exposed some firms to a large and persistent price increase for groundwater, a setting characterized by incomplete markets. Using five years of post-treatment data on farm-level water use, we find that water conservation doubles between the first and fifth year of the tax. Failure to account for dynamics in policies designed to manage groundwater will understate the price elasticity of demand and introduce efficiency costs. Nick Hagerty, Koichiro Yusuke Kuwayama, Pierre Mérel, Mieno, Moser, Reguant, Sears, Sexton, Smith, Woerman, David Zilberman, Oregon State University, of Mines, California Polytechnic State University, University of Chicago, University of Massachusetts Amherst, University of Pittsburgh, University of Arizona, Montana State University, University of Nevada Reno, and Pennsylvania State University for helpful discussions and comments. A special thanks goes to Brian Lockwood, Marcus Mendiola, Casey Meusel the Pajaro Valley Management for sharing data and institutional knowledge. This project also benefited the research of Jack Gregory and and the technical support of Eric Lehmer at the Geospatial Innovation Facility at UC Berkeley. Funding and support for this research comes from: the National Bureau of Economic Research, the California Institute for Water Resources, and the UC Security and Sustainability Research Initiative funded by