The Effects of Self-Imposed Economic Incentives on a Groundwater Commons

Many globally important groundwater aquifers are under extreme stress. Withdrawals, predominantly for irrigated agriculture, are outpacing recharge. The situation is exacerbated by increasing human demand for fresh water as well as a changing climate that alters surface water availability. With many users drawing from a shrinking common-pool of water, it is easy to fall prey to a “tragedy of the commons” and extract water at a rate exceeding the social optimum. Some attribute the current crisis to failures of top-down governance to effectually alter water use. Even in arid areas of the world, extraction of scarce groundwater has not been well regulated. Unregulated irrigators often consider only individual pumping costs when determining how much to extract, ignoring the cost they impose on their neighbors and future irrigators. In some jurisdictions governments are starting to respond with increased top-down regulation: spacing requirements; technological standards; pumping quotas; and in some places, complete shutdown of existing wells. Despite the theoretical cost-saving benefits, few regions have imposed economic incentives due to transaction costs and political frictions. Recently, irrigators in San Luis Valley, Colorado in the United States have sought to stave off state regulation and maintain local flexibility by self-imposing a tax on the water they pump. The goal of this paper is to assess the effectiveness of this self-organized policy in altering irrigators’ behavior. We find that the intervention has led to a movement away from water-thirsty crops, relatively more use of efficient irrigation technology, and, most importantly, significantly reduced volumes of water extracted. Our results show that self-governance and economic incentives are viable alternatives to top-down, command-and-control regulation in an era of global water stress.