Specific Objectives of the Project
1. Analyze the efficiency of the subsidization of efficient irrigation technology.
2. Determine the socially optimal amount of water to pump each year, taking into account the nonrenewable nature of the resource and spatial externalities.
3. Design policies to induce the socially optimal pumping.

Project Report/Summary of Results
In western Kansas, the prior appropriation doctrine gives producers rights to extract groundwater for crop production. This property rights system may distort the incentive for rights-holders to optimize dynamically, leading to a deviation from the economically efficient extraction path. We develop an empirical model to test whether groundwater users faced with the prior appropriation doctrine are behaving in a manner consistent a dynamic model of nonrenewable resource extraction, and apply it to data from western Kansas. We find that despite the incentives given to groundwater users to pump their maximum allowable amount in each year by the prior appropriation doctrine, farmers extract water consistent with a dynamic model of resource extraction. We also find evidence that the original appropriations were allocated in a manner consistent with notions of allocative efficiency.

Encouraging the use of more efficient irrigation technology is often viewed as an effective, politically feasible method to reduce the consumptive use of water for agricultural production. Despite its widespread recommendation, it is not clear that increasing irrigation efficiency will lead to water conservation in practice. To analyze the efficiency of the subsidization of efficient irrigation technology, we evaluate the effect on groundwater extraction of a widespread conversion from traditional center pivot irrigation systems to higher efficiency dropped-nozzle center pivot systems that has occurred in western Kansas. State and national cost-share programs subsidized the conversion. On average, the intended reduction in water use did not occur; the shift to more efficient irrigation technology has increased groundwater extraction, in part due to shifting crop patterns.

To determine if there are inefficiencies in groundwater extraction that arise from farmers not internalizing the spatial externality, we inv estigate the behavior of farmers who share an underground aquifer. In the case where seepage may occur the resource is nonexclusive, giving rise to a spatial externality whereby pumping by one user affects others nearby. Theoretically, these externalities are potentially important causes of welfare loss. Using a unique spatial data set of groundwater users in western Kansas, we are able to empirically measure the physical and behavioral effects of groundwater pumping by neighbors. To address the simultaneity of neighbors' pumping, we use the neighbors' permitted water allocation as an instrument for their pumping. We estimate that 2.5 percent of the total groundwater extracted each year in western Kansas is overextraction due to the effects of spatial externalities. Individuals who own multiple wells internalize their own externality by trading off pumping at one well for pumping at another.

In western Kansas, the prior appropriation doctrine gives producers rights to extract groundwater for crop production. This property rights system may distort the incentive for rights-holders to optimize dynamically, leading to a deviation from the economically efficient extraction path. To determine if there are inefficiencies in groundwater extraction that arise from farmers not optimizing dynamically, we use data from western Kansas are to empirically test hypotheses derived from a physical-economic model. We find evidence that producers behave consistent with hypotheses derived from dynamic theory despite the static definition of their property rights. We also find evidence that the original appropriations were allocated consistently with notions of allocative efficiency.

Encouraging the use of more efficient irrigation technology is often viewed as an effective, politically feasible method to reduce the consumptive use of water for agricultural production. Despite its widespread recommendation, it is not clear that increasing irrigation efficiency will lead to water conservation in practice. To analyze the efficiency of the subsidization of efficient irrigation technology, we evaluate the effect on groundwater extraction of a widespread conversion from traditional center pivot irrigation systems to higher efficiency dropped-nozzle center pivot system s that has occurred in western Kansas. State and national cost-share programs subsidized the conversion. On average, the intended reduction in water use did not occur; the shift to more efficient irrigation technology has increased groundwater extraction, in part due to shifting crop patterns.