measures would be broadly applicable wherever conditions like those in India arise. The World Bank (2010) study argues strongly that if nothing is done with incentives for groundwater pumping involving extremely cheap electricity (typically, only a fixed fee per farmer and no volumetric charges), increasing strains on groundwater resources will be extremely hard to reverse. Both studies recognize that the problem is exceedingly hard to deal with politically. In situations like those in India that are addressed in these studies, many poor farmers are highly dependent on cheap electricity for their normal crop output, even though a substantial share of the overall electricity allocation goes to well-off farmers. Low electricity costs for farmers is part of a “social contract” whereby one group of farmers rely on (near cost free) surface irrigation water, and another group which relies on pumped groundwater. While this represents an “even circle” of sorts, there are serious problems with attempting to upset the balance between these two groups of farmers (such as charging for electricity from one group without charging for surface water from the other group). Thus, the problem seems today to have few “easy fixes”.

We should however note that some researchers, notably Birner et al (2010), open up for a more nuanced view on the main driving forces behind the problems of excessive groundwater extraction. These authors stress two main, competing, viewpoints: the “market-oriented discourse”, and the “welfare-state discourse”.<sup>1</sup> Under the former, the argument runs essentially as above: low electricity pricing is the main problem. Under the “welfare-state discourse”, low electricity pricing to farmers is not seen as the main cause. Rationing of farmers’ water extraction (via rationing of their electricity supplies) is instead considered sufficient to keep effective water demand at a “reasonable” level (by this is typically meant a level equivalent to demand given a “normal” electricity price, in the absence of rationing). Their argument is that farmers use the water they “need”, for the cropping patterns chosen. The basic problem, it is argued there, is instead inefficient crop choice, as illustrated in the Indian context by the government’s encouragement of paddy cultivation. This argument may clearly have some bite: water-intensive crops such as paddy and sugar cane, grown extensively in Northern India, are substantially more water intensive than many other relevant (and higher-value) crops.

In the model developed below, sufficiently strict rationing of electricity supply to farmers could in principle (but only as a special case) implement an overall optimal level of groundwater extraction, even in the absence of electricity pricing. We will however see that other inefficiencies will then usually result, including inefficient distribution of electricity supply (and water extraction) across farmers, and substandard power supply service including excessive system losses. An important caveat is that the discussion in this note will focus less on political economy problems of the types stressed in the World Bank (2010) and Birner et al (2010) documents, and more on economic issues in particular related to allocation and efficiency, including how to identify sources of “allocation loss” relative to benchmarks. Importantly, distributional considerations are sidestepped.

Our formal analysis will also be less centered on agricultural issues such as crop choice and irrigation patterns and practices, even though such underlying issues are at the heart of the problem (in particular, issues pertaining to point 7 above will not be dealt with). These issues are discussed only in a summary way, by simply defining a marginal value function for water as used in the agricultural sector. In addition, there is also no substantial discussion of the

> 1 Birner et al (2010), pp 146-147.

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