January 25, 2003

2003: Highlight # 6

Flat tariffs, and associated zero marginal cost of pumping, are often blamed for groundwater over-exploitation. Kishore and Verma argue that there's more to the story...

What Determines Pumping Behaviour of Tubewell Owners

Marginal Cost or Opportunity Cost?

Avinash Kishore and Shilp Verma

It is a common belief that flat tariff system leads to inefficiency in water and energy use in irrigation because it makes incremental cost of pumping negligible. However, in areas with vibrant water markets and rationed power supply, pumping behaviour is not determined by the incremental cost. Therefore, imposing unit rates by metering will not lead to increased efficiency.

Flat rate tariff can however ensure efficiency if tariff rates are reasonable and rationing is effective.

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