Estimating the value of groundwater in irrigation

Islam, Shahnila

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https://hdl.handle.net/2142/16200 Copy

Description

Title

Estimating the value of groundwater in irrigation

Author(s)

Islam, Shahnila

Issue Date

2010-05-19T18:40:27Z

Director of Research (if dissertation) or Advisor (if thesis)

Brozović, Nicholas

Department of Study

Agr & Consumer Economics

Discipline

Agr & Consumer Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

M.S.

Degree Level

Thesis

Keyword(s)

• Groundwater
• irrigation
• hedonics

Abstract

In recent years there has been increasing regulation of agricultural water use in order to reduce transboundary and environmental water conflicts. Effective policy analysis to support new regulations needs to have tools to estimate correctly the value of irrigation water. Irrigating land increases crop yields and this higher profitability should be capitalized into the sales price of the land. For irrigation that depends on surface water rights, studies have found this to be the case (Xu et al. 1993, Faux and Perry 1999). However, studies that have analyzed the value of groundwater in irrigation have found mixed results. Hartman and Taylor (1989) and Sunderland, Libbin and Torell (1987) find that groundwater irrigation has no significant effect on land prices; Torrell et al. (1990) find a significant positive effect of groundwater in irrigation. One explanation is that in areas where groundwater use is not restricted there is the option to implement irrigation in the future and thus the presence of groundwater irrigation may not have a large effect on the sales price. Consistent with this idea of option value, Petrie and Taylor (2007) look at differences in land values before and after a moratorium on water-use permits and find that permits add value to agricultural land only after the restriction is in place. An additional econometric issue is that the decision to irrigate is not random but is based on the underlying characteristics of the land. Thus hedonic estimates of the value of irrigation rights may be biased. In this thesis we analyze the value of groundwater in an area with pumping restrictions using both a standard hedonic model and a propensity score matching model. we use a geospatial database from Chase County, Nebraska that includes arms length sales, tax assessor’s data, hydrologic and climatic variables. We find that per acre values of groundwater irrigation are over 15 percent higher using the propensity score method compared to the hedonic model. This result is driven in large part by the preferential adoption of irrigation on intermediate quality land. An important implication for policy is that hedonic estimates of the value of groundwater in irrigation may underestimate the cost, to both farmers and the government, of future water use reductions.

Graduation Semester

2010-5

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http://hdl.handle.net/2142/16200

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Copyright 2010 Shahnila Islam

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