| Many rural agricultural areas around the world are facing severely depleted groundwater resources, which farmers rely on to increase agricultural productivity through irrigation. If groundwater in these areas is to be sustainably utilized, total withdrawals must be diminished from their current levels, which may cause a welfare loss on the part of farmers and their communities. The level of welfare loss (if any) and its distribution will depend which of a wide array of policies are implemented to curtail water use. In theory, the policies may take many forms, including direct and indirect rationing, direct and indirect marginal pricing, tradable water rights, and subsidizing water efficient technologies such as microirrigation. Depending on the environment in which they are implemented, these policies vary widely in terms of cost, effectiveness, and political feasibility, and may lead to many non-obvious interactions when multiple policies are implemented simultaneously.;This research contributes to a policy debate motivated by the situation in North Gujarat, India, where a mix of recently enacted policies has somewhat helped to improve the groundwater situation, but in an inefficient manner. Specifically, this research is aimed at understanding the changes water market participants may experience should there be a move to formalize water markets and establish tradable water rights - a costly and politically challenging proposition, but one with ostensibly significant advantages. It considers the situation in which fragmented private groundwater markets already exist as a collection of monopolies, and a policy is needed to reduce village-level water use to sustainable levels, vii focusing on two questions. What are the marginal effects of a tradable water rights system on income distribution across buyers and sellers, and how are they contingent on a variety of policy settings and other uncertainties?;These questions are addressed using a simulation framework in which a population of smallholder agents exchanges water in competitive and monopolistic water markets. In any given model run, agents are modeled as producing one of two crops: a water inefficient low revenue crop, and a water efficient crop with higher revenues that also requires capital investment to grow (which captures the choice between flood irrigation versus microirrigation, though can also represent field crops vs horticulture). Farmers are assumed to maximize profits subject to water prices which determined by policy or endogenous water markets, and subject to capital constraints on their ability to adopt microirrigation, which are in turn affected by subsidy and loan policy for the water efficient technology. While the individual agent-level model is somewhat simplistic from an agronomic perspective, a systematic and wide parametric exploration of agent interaction via the water market allows characterization of the outcomes that may arise from the simultaneous interaction of many different policies, under many different population types.;I present results showing the impacts to buyer and seller populations across tens of thousands of parameter combinations chosen to explore this range of plausible interactions. Not surprisingly, buyers typically benefit from the merging of fragmented monopolies into a single competitive water market, often at the expense of sellers who lose their monopoly rent. However, in a surprisingly large number of cases the gains from trade among sellers can outweigh their losses in monopoly rent, and in some cases buyers can be made worse off. Pairing the market formalization with subsidies to adopt microirrigation can improve outcomes for both buyers and sellers, though such subsidies are not always Pareto-improving at the private level, due differential adoption and productivity levels between buyers and sellers. They are also socially inefficient in many cases once subsidy costs have been accounted for. In general, the "win-win" potential of formalizing the water market depends heavily on viii cropping patterns, agent characteristics governing technology adoption, and the degree of water scarcity. This implies that, while the establishment of tradable water rights will often bring many benefits to smallholder populations, it is not guaranteed to do so and any ex-ante detailed assessments of such a policy must consider village- and aquifer-level details, as well as the factors governing technology adoption. |
