Over-drilling: Local Externalities and the Social Cost of Electricity Subsidies in South India" with Xavier Giné, Hanan G. Jacoby, and Pedro Mira

Abstract:

Borewells have proliferated across India in recent years, partly in response to massive electricity subsidies that encourage groundwater pumping. This paper estimates a dynamic structural model of well-drilling using panel data collected in two districts of southern India. Due to well interference, a highly localized common property externality, farmers interact strategically across a network of adjacent agricultural plots. We use the model estimates to quantify the social costs of the current policy of free (but rationed) electricity to agriculture. We also assess how local externalities exacerbate these social costs and how long it takes for the groundwater economy to transition to a new steady-state under the counterfactual flat charge for electricity.