An Economics Experiment

April 25, 2018

Mexico’s aquifers are severely depleted. According to researchers at the University of California at Riverside, 101 of the country’s 188 major aquifers have reached the point of overdraft.

In 1994, when the North American Free Trade Agreement (NAFTA) went into effect, the Mexican government was concerned that the nation’s farmers would be at a disadvantage in the free market. Therefore, in an effort to help farmers compete, the government offered them an electricity subsidy to pump groundwater for irrigation.

“The distribution was skewed,” explains Ariel Dinar, professor of environmental economics and policy at the University of California at Riverside, since large-scale farmers withdrew more water and benefitted more than small-scale farmers. This scenario resulted in an unsustainable system that led to over-use of the country’s aquifers.

Dinar sought solutions. He and colleagues Amnon Rapoport, a distinguished professor of management in the School of Business Administration, and Edgar Tellez Foster, a senior environmental engineer at Chino Basin Watermaster, decided to test three different policy interventions to address the water scarcity issues brought on by the electricity subsidy.

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In a laboratory setting at UC Riverside, they tested the three policy reform scenarios: subsidy elimination, reduction of the subsidy level, and decoupling or delaying the subsidy payment until the end of the year. Researchers then verified their results in a field experiment with farmers from Léon, Mexico. Their study was published last week in the Journal of Behavioral Economics for Policy.

All three of the policy interventions (elimination, reduction, and decoupling) had positive implications for conservation. Subsidy elimination, however, resulted in the largest reduction in requests for groundwater. Researchers explained that decoupling presented similar effects, and noted that the policy reform scenario may pave the way for a smoother political transition to subsidy elimination and economic stability.

What policy shifts would you suggest to support Mexico’s aquifer management? What lessons can domestic water policy-makers glean from this study?
About the Author

Laura Sanchez

Laura Sanchez is the editor of Distributed Energy and Water Efficiency magazines.