Monopoly and Micro-Irrigation in Smallholder Water Markets

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.