Groundwater and Electricity Consumption under Alternative Subsidies: Evidence from Laboratory Experiments

Pervasive energy subsidies for groundwater pumping pose a challenge for policy makers around the world who cope with lowering water tables from increased reliance on groundwater resources for irrigation. This paper outlines a series of laboratory experiments aimed to study the groundwater extraction decisions of stakeholders under alternative subsidy structures. We propose a model and a methodology for testing the implications of the model and the modification of energy subsidies for irrigation. We analyze the performance of two traditional policy interventions, namely, elimination of the subsidy and reduction of subsidy, and then analyze a novel policy: decoupling of the subsidy from the electricity rate by replacing it with a lump sum transfer. Our experimental results suggest that the rate of water extraction and the level of water in the aquifer, which are undesirable under the existing electricity subsidy, can be significantly improved by altering the subsidy structure. An important finding for policy is that the decoupling leads to similar outcomes as elimination of the subsidy.