Can Groudwater Markets Promote Efficiency in Agricultural Production

"In the hard rock areas of India overdraft of groundwater is resulting in negative externalities such as reduction in water table and well failures. This has increased the costs of groundwater irrigation resulting in inefficiency and welfare losses. Informal groundwater markets are slowly emerging with the potential of improving water distribution and mitigating scarcity. This study aims to demonstrate how groundwater markets can improve efficiency in agricultural production. The technique applied is to quantify input use efficiency or, more specifically, to relate economic surpluses to inputs applied, using Data Envelopment Analysis (DEA). The efficiency was estimated for three groups of famers: (i) a control group: farmers are not selling or buying groundwater, (ii) a water seller group: farmers are selling groundwater and (iii) a water buyer group: farmers are buying groundwater. The results indicate that, water buyers are more efficient followed by sellers and the control group, in particular, in using inputs in general and water specifically. Hence, groundwater markets promote efficiency among those participating in water markets. Differences in efficiencies between the groups are shown to be significant using a Kruskal-Wallis test. The information provided by this study can be used by policy makers to determine their attitude towards the emerging groundwater markets."
externalities, efficiency, data analysis, groundwater, markets