Price Incentives for Resource Conservation: Experimental Evidence from Groundwater Irrigation

Groundwater is a vital input to agricultural production worldwide, but a widespread lack of marginal pricing or other effective regulation often leads to misallocation, overconsumption, and depletion. As precipitation and surface water supplies become scarcer and less reliable in many regions, effective groundwater management is becoming an urgent means for rural communities to adapt to climate change. And where groundwater extraction relies on subsidized electricity, uncontrolled pumping strains the electric grid, limiting utilities’ ability to improve services and holding back energy access priorities. 

We will evaluate a program of price incentives for voluntary groundwater conservation among smallholder farmers in Gujarat, India, where both water and electricity are scarce and largely unregulated. To do so, we install meters and offer payments for reduced groundwater pumping in a randomized evaluation. First, we use the price variation introduced by this program to estimate the price elasticity of groundwater demand, a key parameter required for efficient regulation by any means. Then, we evaluate conservation payments as a potentially useful policy tool in itself, measuring its treatment effects, spillovers, and cost-effectiveness. Pilot evidence confirms that conservation payments are feasible and suggests effects on water use could be large.