Block-rate versus uniform water pricing in agriculture: An empirical analysis

Ziv Bar-Shira*, Israel Finkelshtain, Avi Simhon

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

51 Scopus citations

Abstract

In this article we adapt Burtless and Hausman's (1978) methodology in order to estimate farmers' demand for irrigation water under increasing block-rate tariffs and empirically assess its effect on aggregate demand and inter-farm allocation efficiency. This methodology overcomes the technical challenges raised by increasing block-rate pricing and accounts for both observed and unobserved technological heterogeneity among farmers. Employing micro panel data documenting irrigation levels and prices in 185 Israeli agricultural communities in the period 1992-1997, we estimate water demand elasticity at -0.3 in the short run (the effect of a price change on demand within a year of implementation) and -0.46 in the long run. We also find that, in accordance with common belief, switching from a single to a block-price regime, yields a 7% reduction in average water use while maintaining the same average price. However, based on our simulations we estimate that the switch to block prices will result in a loss of approximately 1% of agricultural output due to inter-farm allocation inefficiencies.

Original languageAmerican English
Pages (from-to)986-999
Number of pages14
JournalAmerican Journal of Agricultural Economics
Volume88
Issue number4
DOIs
StatePublished - Nov 2006

Bibliographical note

Funding Information:
We would like to thank Professor Yoav Kislev for Insightful discussions, two anonymous referees, and the editor of this journal, Stephen Swallow, for valuable comments. We gratefully acknowledge financial support from the Maurice Falk Institute, The Center for Agricultural Economics Research, the chief scientist fund, and the Israeli Ministry of Agriculture. This research was supported by Research Grant Award No. IS-3527-04 from BARD, the United States–Israel Binational Agricultural Research and Development Fund.

Keywords

  • Block-rate pricing
  • Irrigation

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