The Effects of Volumetric Pricing Policy on Farmers’ Water Management Institutions and Their Water Use

This article examines the effect of
water pricing policies on farmers’ water saving behaviors,
using original water user group (WUG) data from a reservoir
irrigation system in China. The introduction of volumetric
water pricing at the group level, to replace area-based
pricing, induces institutional change to prevent each
member’s overuse of water when the volumetric price levels
are moderate. Depending on the initial conditions, the
multiple pathways of change lead to new institutional
arrangements, with all of them contributing to water
savings. However, when the price is set high enough, many
farmers exit a WUG for private irrigation. This tendency is
associated with an increased probability that the remaining
members do not undertake institutional change and that they
do not end up saving water. This may be due to the increased
management difficulties among the remaining members whose
fields are separated by former members who have now opted
out for private irrigation across the WUG. As a result, we
do not find evidence that the reservoir water is saved at
high volumetric price levels.