The goal of this paper is to analyze whether reforming groundwater pricing has the potential to encourage water conservation and assess its impacts on crop production and producer income in rural China. Household-level water demands are estimated so that adjustments at both the intensive and extensive margins are captured. The results show that a large gap exists between the cost of water and the value of water to producers. Simulation analysis shows that reforming water pricing can induce water savings. However, the price of water needs to be raised to a relatively high level. We also find that the value-based policy is more effective than the cost-based policy since it generates larger water savings, given the same increase in the average price of water. While raising the price of water negatively affects crop production and crop income, higher water prices do not adversely affect the distribution of household income.
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