Three essays on the economics of groundwater extraction for agriculture: Property rights, externalities, and policy

A unique data set of groundwater users in western Kansas is combined with hydrological data that describe the physical properties of the aquifer system they draw from. The data are used to investigate some of the most important hypotheses emerging from the theoretical groundwater management literature.;The second essay investigates the behavior of farmers who share a common pool resource; in this case, an underground aquifer. In the case where seepage may occur the resource is rendered non-exclusive, giving rise to a spatial externality. Theoretically, these externalities are potentially important causes of welfare loss. We empirically measure the physical and behavioral effects of groundwater pumping by a farmer's neighbors. To address the endogeneity of neighbors' pumping, we use the neighbors' permitted water allocation as an instrument for their pumping. We find evidence of both physical and behavioral neighborhood effects, but the effects are small and concentrated in space. We estimate that two percent of the total amount of groundwater extracted each year in western Kansas is over-extraction due to the effect of spatial externalities.;The final essay concerns water conservation policies that lawmakers in Kansas have enacted to reduce groundwater extraction in areas where they view that the water stock is being depleted too rapidly. Two incentive-based groundwater conservation programs are considered and their effects on groundwater extraction for irrigated agriculture estimated. We find that the programs have not had the intended effect; the subsidization of more efficient irrigation technology induces the production of more water intensive crops, thus increasing total extraction, and land retirement programs are generally not utilized on irrigated land, thus having little effect on groundwater extraction.;In the first essay, the importance of property rights and their effect on groundwater management over time is investigated. Property rights systems create incentives that affect the way individuals manage groundwater resources. The prior appropriation doctrine may distort the incentive for rights-holders to optimize dynamically, leading to a deviation from the economically efficient extraction path. We find empirical evidence that despite static definition of property rights, producers behave consistent with hypotheses derived from dynamic theory.