Political Economy and Irrigation Technology Adoption Implications of Water Pricing under Asymmetric Information

We analyze the design of water pricing rules emerging from farmers' lobbying and their implications for the size of the lobby, water use, profits and social welfare. The lobbying groups are the adopters of modern irrigation technology and the non-adopters. The pricing rules are designed to meet budget balance of water provision; we considered (i) a two-part tariff composed of a mandatory per-acre fee plus a volumetric charge and (ii) a nonlinear pricing schedule. Our results show that under either pricing schemes, farmers can organize and affect the outcome of the water schedule design. When only a volumetric fee is levied, the budget balance constraint prevents lobbies from influencing the design of the pricing scheme. In terms of expected welfare, the two-part tariff is preferable to the nonlinear pricing scheme or an inflated marginal cost fee