Block-Rate versus Uniform Water Pricing in Agriculture: An Empirical Analysis

Posted: 13 Oct 2006

See all articles by Ziv Bar-Shira

Ziv Bar-Shira

Hebrew University of Jerusalem - Faculty of Agricultural, Food and Environmental Quality Sciences

Israel Finkelshtain

Hebrew University of Jerusalem

Avi Simhon

Hebrew University of Jerusalem

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.

Suggested Citation

Bar-Shira, Ziv and Finkelshtain, Israel and Simhon, Avi, Block-Rate versus Uniform Water Pricing in Agriculture: An Empirical Analysis. American Journal of Agricultural Economics, Vol. 88, No. 4, pp. 986-999, November 2006, Available at SSRN: https://ssrn.com/abstract=937052 or http://dx.doi.org/10.1111/j.1467-8276.2006.00911.x

Ziv Bar-Shira (Contact Author)

Hebrew University of Jerusalem - Faculty of Agricultural, Food and Environmental Quality Sciences ( email )

Jerusalem
Israel

Israel Finkelshtain

Hebrew University of Jerusalem ( email )

Mount Scopus
Jerusalem 91905, Jerusalem 91905
Israel
+08-9489255 (Phone)

Avi Simhon

Hebrew University of Jerusalem ( email )

Mount Scopus
Jerusalem 91905, Jerusalem 91905
Israel
+972 2 588 3237 (Phone)
+972 2 581 6071 (Fax)

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