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Allocative inefficiencies resulting from subsidies to agricultural electricity use : an illustrative model, Volume 1
 
Author:Strand, Jon; Country:World;
Date Stored:2012/01/19Document Date:2012/01/01
Document Type:Policy Research Working PaperSubTopics:Energy Production and Transportation; Electric Power; Water and Industry; Economic Theory & Research; Wastewater Treatment
Language:EnglishMajor Sector:Energy and mining
Rel. Proj ID:1W-Political Economy Of Energy Subsidies And Their Reform -- -- P123604;Region:The World Region
Report Number:WPS5955Sub Sectors:Oil and gas; General energy sector; Power
Collection Title:Policy Research working paper ; no. WPS 5955Paper is funded by the Knowledge for Change Program (KCP)Volume No:1

Summary: This paper provides an analytical discussion of several interconnected resource allocation problems from under-pricing of electricity used by farmers for groundwater extraction. In these situations, groundwater extraction is inefficiently high even without electricity under-pricing. Moreover, part of the electric power supply intended for farmers is often diverted to other unauthorized uses (notably illicit consumption). The paper demonstrates that unless non-price electricity rationing imposes severe constraints on demand, the range of resource allocation problems includes insufficient incentives to provide high-level service by the power utility, insufficient incentives for farmers to install and operate efficient equipment, and losses due to political "rent seeking" activities to influence water allocations. It also shows that diversion of electricity to illicit uses can increase overall economic efficiency when this leads to less electricity use by farmers, thus somewhat ameliorating the problem of excessive groundwater extraction as well as the inefficiencies related to under-pricing of electricity. Systemic reforms for overcoming these problems may face severe political obstacles.

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