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BESS - Rationing the Commons

CEU Building
Monday, January 13, 2020, 11:00 am – 12:15 pm

Rationing the Commons

Many common resources are managed not with efficient regimes, as described by Pigou, Coase or Ostrom, but with crude ones, like quotas and bans. This paper studies how one such blunt policy, rationing the commons, shapes the efficiency and equity of agricultural groundwater use in Rajasthan, India. India is the world’s largest user of groundwater and de facto manages this resource by rationing the electricity that powers irrigation pumps. Since water has no price and power prices are nominal, the ration acts as the only check on farmers’ water use. We model agricultural production under rationing and derive a formula for the optimal ration, which depends on farmers’ returns to water in agricultural production. Even at an optimal ration, the rationing regime induces a misallocation of power and water, which is larger the more dispersed is productivity: unproductive farmers use too much, due to low prices, while the ration constrains productive farmers to use too little. To recover the optimal ration, we use an instrumental variables strategy, based on the geology of groundwater, to estimate a hedonic regression for how farmer profits depend on water in the long run. Our estimates show that water scarcity sharply decreases farmer yields and profits. We apply our empirical results to calculate the optimality of the observed ration, six hours per day, by comparing the marginal social benefits and costs of relaxing the ration. We find that, despite the high value of water to farmers, the current rationing regime is perhaps not strict enough, and can be rationalized by the government placing zero value on the future use of groundwater.