Groundwater Overdraft, Electricity, and Wrong Incentives : Evidence from Mexico Vincente Ruiz WP 2016.05 Suggested citation: V. Ruiz (2016). Groundwater Overdraft, Electricity, and Wrong Incentives : Evidence from Mexico. FAERE Working Paper, 2016.05. ISSN number: 2274-5556 www.faere.fr Groundwater Overdraft, Electricity, and Wrong Incentives: Evidence from Mexico by Vicente Ruiz⇤ Last version: January 2016 Abstract Groundwater overdraft is threatening the sustainability of an increasing number of aquifers in Mexico. The excessive amount of groundwater ex- tracted by irrigation farming has significantly contributed to this problem. The objective of this paper is to analyse the effect of changes in ground- water price over the allocation of different production inputs. I model the technology of producers facing groundwater overdraft through a Translog cost function and using a combination of multiple micro-data sources. My results show that groundwater demand is inelastic, -0.54. Moreover, these results also show that both labour and fertiliser can act as substitutes for groundwater, further reacting to changes in groundwater price. JEL codes:Q12,Q25 Key words: Groundwater, Electricity, Subsidies, Mexico, Translog Cost ⇤Université Paris 1 - Panthéon Sorbonne, Paris School of Economics (PSE). Centre d’Économie de la Sorbonne, 106-112 Boulevard de l’Hopital, 75647, Paris Cedex 13, France. Email:
[email protected] Introduction The high rate of groundwater extraction in Mexico is threatening the sustainability of an increasing number of aquifers in the country. Today in Mexico 1 out of 6aquifersisconsideredtobeoverexploited(CONAGUA, 2010). Groundwater overdraft is not only an important cause of major environmental problems, but it also has a direct impact on economic activities and the wellbeing of a high share of the population.