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Spatial Externalities in Groundwater Extraction: Evidence from California Agriculture
March 18, 2019 @ 2:00 pm - 3:00 pm
University of Chicago
Groundwater is a common-pool resource essential for agricultural production. When farmers extract a marginal unit of groundwater, this lowers nearby groundwater levels and increases their neighbors’ groundwater pumping costs. This paper estimates farmers’ elasticity of demand for groundwater, in order to empirically investigate the magnitude of this spatial “pumping cost” externality. We assemble a novel dataset that combines (i) detailed and (iii) publicly available measurements of groundwater depths in California aquifers. Using exogenous variation in electricity prices, we estimate farmers’ price elasticities of demand for both electricity (-1.17) and groundwater (-1.12) to be much larger than previous estimates in the literature. We then calculate the extent to which each farm lowers its neighbors’ economic surplus by removing water from their shared aquifer. Our preliminary results suggest that the magnitude of the “pumping cost” externality is likely smaller than farmers’ private costs of groundwater pumping.
Bio: Louis Preonas is a postdoctoral scholar at the University of Chicago in the Department of Economics and the Energy Policy Institute. He received his PhD in Agricultural and Resource Economics from the University of California, Berkeley, where he also conducted research at the Energy Institute at Haas. In August, he will join the University of Maryland’s Department of Agricultural and Resource Economics as an Assistant Professor. His recent work examines market power in U.S. coal transportation and analyzes the extent to which decreasing coal markups may lead to incomplete pass-through of a carbon tax.