Abstract:
In many parts of California, water districts set prices so that agricultural users pay far less than residential users and far less than the true cost of water. While the adoption of a marginal cost pricing system would bring enormous efficiency gains, it would inevitably create losers as well as winners. To anticipate the problems of implementing such a pricing system in California, reformers need to anticipate which regions and which crops in California would be most affected. The case provides the information necessary to do a partial equilibrium incidence analysis, including data on the average factor share of water by crop, the average value created for each crop by marginal applications of water, the degree of interregional variation in the ratio of non-water inputs, and the role of each crop in the California and worldwide market.
Learning Objective:
This case is designed to review the basic concepts in market dynamics, including supply and demand elasticities, factor substitution, and marginal value products. The case can also be used to discuss market alternatives to marginal cost pricing by water districts.
