Irrigation Water Pricing Policy in Rural China

The goal of this paper is to analyze the potential of reforming water pricing as a way to encourage water conservation and to assess its impacts on crop production and producer welfare in rural China. To meet this goal, we develop an approach that can inform policy makers about the effectiveness of water pricing policy as well as how water pricing policy should be implemented. The first step in the approach involves estimating a set of crop-specific production frontiers as well as household level technical inefficiency parameters. The estimation results aid us in measuring the relationship between water and crop output as well as the value of water to households. Our results indicate that there is a large gap between the value of water and the current water cost in many places. Simulation analyses show that reforming water pricing can induce water savings but the price of water needs to be raised to a relatively high level. We also find that a water pricing policy that takes into account this gap (the informed policy) can be more effective than a policy that ignores it (the uninformed policy) in that it generates larger water savings given the same increase in the average price of water. Raising the price of water negatively affect crop production and crop income, which means supplementary polices should be used to compensate farmers. Higher water prices do not adversely affect the distribution of household income.