Inefficient Water Pricing and Incentives for Conservation

Abstract

Farmers often buy water using fixed fees—rather than with marginal prices. We use two randomized controlled trials in Bangladesh to study the relationship between marginal prices, adoption of a water-saving technology, and water usage. Our first experiment shows that the technology only saves water when farmers face marginal prices. Our second experiment finds that an encouragement to voluntarily convert to hourly pumping charges does not save water. Taken together, efforts to conserve water work best when farmers face marginal prices, but simply giving an option for marginal pricing is insufficient to trigger water-saving investments and reduce irrigation demands. (JEL O13, Q12, Q15, Q16, Q25)