Estimation of Irrigation Water Demand and Economic Returns of Water in Zhangye Basin

The objective of this study is to provide estimates of price elasticities of irrigation water demands in Zhangye Basin (ZB), an inland river basin in China, with the most recent data and to compare the values of marginal product (VMPs) of water to the prices of water farmers are currently paying. With a set of village and household survey data collected in 2009 and 2014, household fixed effects models are used to estimate water demand and crop production functions. The estimation results are then used to estimate price elasticities and VMPs. Results show that demands for surface water, groundwater, and conjunctive irrigation water are all in the inelastic range. The results imply that water prices may need to be increased significantly to induce sizable water savings. Another significant finding is that for a large share of the sample households, VMPs of water are higher than the prices of water. The estimated VMPs provide policy makers with some guidelines on the minimum level of water prices required to achieve any water savings among those households.