Journal of Hydrology 408 (2011) 226–234

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Journal of Hydrology
journal homepage: www.elsevier.com/locate/jhydrol

Estimating the own-price elasticity of demand for irrigation water in the Musi
catchment of India
Brian Davidson a,⇑, Petra Hellegers b
a
University of Melbourne, Parkville, Victoria 3010, Australia
b
Wageningen UR, LEI, P.O. Box 29703, 2502 LS The Hague, The Netherlands

a r t i c l e i n f o s u m m a r y

Article history: As irrigation water is an input into a production process, its demand must be ‘derived’. According to the-
Received 1 November 2010 ory, a derived demand schedule should be downward sloping and dependent on the outputs produced
Received in revised form 26 May 2011 from it, the prices of other inputs and the price of the water itself. Problems arise when an attempt is
Accepted 31 July 2011
made to estimate the demand for irrigation water and the resulting own-price elasticity of demand, as
Available online 9 August 2011
This manuscript was handled by Geoff
the uses to which water is put are spatially, temporarily and geographically diverse. Because water is
Syme, Editor-in-Chief not generally freely traded, what normally passes for an estimate of the own-price elasticity of demand
for irrigation water is usually a well argued assumption or an estimate that is derived from a simulation
Keywords:
model of a hypothesized producer. Such approaches tend to provide an inadequate explanation of what is
Derived demand for irrigation an extremely complex and important relationship. An adequate explanation of the relationship between
Own-price elasticity of demand for water the price and the quantity demanded of water should be one that not only accords with the theoretical
Residual Method expectations, but also accounts for the diversity of products produced from water (which includes the
Marginal value product of water management practices of farmers), the seasons in which it is used and over the region within which it
Krishna Basin is used. The objective in this article is to present a method of estimating the demand curve for irrigation
India water. The method uses actual field data which is collated using the Residual Method to determine the
value of the marginal product of water deployed over a wide range of crops, seasons and regions. These
values of the marginal products, all which must lie of the input demand schedule for water, are then
ordered from the highest value to the lowest. Then, the amount of irrigation water used for each product,
in each season and in each region is cumulatively summed over the range of uses according to the order
of the values of the marginal products. This data, once ordered, is then used to econometrically estimate
the demand schedule from which the own-price elasticity of demand for irrigation water can be derived.
To illustrate the method, the values of the marginal product of water deployed in the Musi catchment in
India are used to determine an own-price elasticity of demand for irrigation water which has some posi-
tive value to producers of approximately 0.64. For water that is most highly valued, the elasticity was
found to be highly elastic at 2.12, while less valued water used in agriculture was far more inelastic at
0.44. Finally, for almost 36% of water deployed in the catchment the elasticity was logically determined
to be perfectly elastic.
Crown Copyright Ó 2011 Published by Elsevier B.V. All rights reserved.

1. Introduction array of crops. For a farmer, irrigation is essentially a solution for

The input demand schedule for irrigation water is a reflection
and embodiment of the factors that affect farmers’ decisions to
pay for and use that resource. In an aggregate sense, say over a
catchment, estimating the demand for irrigation water and its con-
comitant own-price elasticities is a complex task. Even within a
fairly contained catchment irrigated agriculture can be spread over
a massive area, using water in different seasons to produce a wide
⇑ Corresponding author. Address: Department of Resource Management and
Geography, University of Melbourne, Parkville, Victoria 3010, Australia. Tel.: +61 3
8344 8633; fax: +61 3 8344 4665.
E-mail address: b.davidson@unimelb.edu.au (B. Davidson).
dealing with the problem of inadequate or unreliable rainfall. Irri-
gation can be defined as the movement of water in time and space
which results in the movement in agriculture in time and space.
Even more compelling is the observation that farmers faced with
more reliable supplies of water may choose to produce crops that
could not normally be grown in a region due to the lack of water, or
which have an uneven spatial and temporal distribution of water.
Thus, providing irrigation water ultimately results in the geo-
graphic and occupational mobility of the products that are pro-
duced from it. In addition, reliable supplies of water affect the
investment decision behavior of farmers. Farmers’ precautionary
strategies to protect against the possibility of catastrophic loss in
the event of unreliable supply may lead them to select less risky

0022-1694/$ - see front matter Crown Copyright Ó 2011 Published by Elsevier B.V. All rights reserved.
doi:10.1016/j.jhydrol.2011.07.044
 B. Davidson, P. Hellegers / Journal of Hydrology 408 (2011) 226–234 227

but less profitable crops, under-use fertilizers, shift household la- marginal products of water should lie on the input demand schedule
bor to less profitable off-farm activities, and avoid investment in for the resource. So, combining this with some knowledge of the
production assets and improved technology. The point is that quantities of water supplied to each crop, in each region and during
farmers approach the use of irrigation water in a multitude of each season, it should be possible to estimate the input demand
ways, changing what they grow to produce a greater diversity of schedule for water and its own-price elasticity of demand.
crops using methods that are appropriate to the task, given the cir-
cumstances in which they find themselves.
2. Objectives
This complexity of purpose and task can be compared to the
process and rigor of estimating the own-price elasticity of demand
The aim in this article is to present and apply a method of esti-
for irrigation water (i.e. the responsiveness of the quantity de-
mating the own-price elasticity of demand for irrigation water in a
manded to a change in its price). The methods currently used are
catchment. This approach needs to accord with the theoretical
far from sophisticated and do not reflect or account for the diver-
necessities of being a derived demand, i.e. negative and account
sity of decisions that could be made or the conditions that exist
for the prices of outputs and other inputs. But ideally, it must more
in a catchment. Ignoring those studies where an elasticity is just
adequately reflect its richness of the spatial, temporal, geographi-
assumed (a fairly inelastic one in the short run and a more elastic
cal and occupational diversity of irrigation water use. To be useful
one in the longer run), the normal approach is to estimate a mar-
to policy makers this estimate should be calculated on the social
ginal value from a mathematical programming model of a typical
demand curve, not the private one that exists in a taxed or subsi-
irrigation farm (for recent reviews of many studies into the de-
dized environment.
mand for irrigation water see Bontemps and Couture, 2002; Appels
It should be noted from the outset that the aim in developing
et al., 2004; Young, 2005; Scheierling et al., 2006; Griffin, 2006;
this method is not to replace the other more accepted methods.
Bell et al., 2007). It should be noted that analysts are forced to
Rather it is to complement the other methods, in order to develop
use these approaches because no reliable market based data exists
a better understanding of what is occurring.
upon which a range of water quantities and prices could be used to
The method developed in this paper relies on determining the
estimate the demand schedule. Thus, it could be argued that the
value marginal product of water used to produce a wide range of
ability of analysts to estimate an elasticity for irrigation water is
crops, grown over different seasons and regions (which were
dependent on their perception of how water is used, rather than
determined using the Residual Method outlined in Young, 2005
what is actually occurring.
and as applied in Hellegers and Davidson, 2010). These values of
These programming approaches do not expressly reflect the
the marginal products for irrigation water used in each season,
richness associated with using irrigation water. For instance, it
for each crop in each region theoretically lie on the input demand
has been observed that as irrigation water becomes increasingly
schedule for irrigation water, if it is assumed that constant returns
limited farmers tend to not to produce certain crops in some preor-
to scale exist and that irrigators maximize profits (Salvatore, 2004).
dained order (see Vinot, 2009). Molle et al. (2009) examined how
So in order to understand the demand relationship it is necessary
farmers adapted to water scarcity and unreliable water availability
to find the quantity of water deployed in each crop, during each
in six different river basins of Asia and the Middle East. They sug-
season and in each region that corresponds to each value marginal
gested farmers undertake several types of local adjustments includ-
product. Thus, the loci of these points should represent the input
ing supply augmentation, conservation, reallocating entitlement to
demand for irrigation water and from this relationship, it should
a particular crop and to ‘‘bend’’ predicted allocation patterns by
be possible to determine the own-price elasticity of demand for
tampering with infrastructures or resorting to sociopolitical net-
irrigation water in a catchment.
works. Institutional innovations with irrigation water also occur.
This method is applied to the Musi catchment in India, where
In some way, all these actions and responses affect the returns
the values of the marginal products of nine different crops grown
farmers get from deploying water and how they react to its price.
over two seasons in five different regions are already known (see
The demand for irrigation water is a complex issue, which re-
Davidson et al., 2009; Hellegers and Davidson, 2010). In obtaining
quires more than just an assumption about what its elasticity
these estimates the influences of taxes and subsidies have been ex-
might be, or one derived from a hypothesized farm within a catch-
cluded. The amount of water allocated to each crop, in each season
ment, regardless of how well it is modeled and simulated. How-
and in each region is know (see George et al., 2011). In order to fur-
ever, it should be noted that obtaining estimates of the own-
ther investigate the demand for water, the data for the Musi catch-
price elasticity of demand for irrigation water is not an easy task.
ment can be segregated into three distinct groups in order to
Ward and Michelsen (2002), Davidson (2004), Young (2005), Grif-
determine how farmers who produce different crops may react dif-
fin (2006) and Hanemann (2005) amongst many others have com-
ferently to a change in the price of water. In addition, the impacts
mented on the difficulties of dealing with a product that is not
that arise from a change in the prices of outputs (the factor Helleg-
actively traded in a market (thus reducing the possibilities of using
ers and Davidson found to have the greatest impact on water val-
an inductive approach) and one that is riddled with market fail-
ues and an element that will result in horizontal shifts in demand)
ures. Adding to this is the complexity that irrigation water itself,
can also be investigated.
the products produced from it and the factors that are combined
with it are either taxed and/or subsidized heavily by governments.
What is required to obtain a better estimate of the own-price 3. Theoretical considerations
elasticity of irrigation water is better information on the value water
provides to the production process. This information will need to be In this study of interest is the estimation of a derived demand
obtained using a deductive approach (as water is not traded in a schedule for irrigation water and the concomitant own-price elas-
market) and should ideally be derived from the range of activities ticity that can be derived from it. Varian (1987, p. 4) outlines how a
currently being undertaken in the catchment in question. Young demand schedule should be thought of in what he terms a ‘reser-
(2005) reviews these methods and suggests that the Residual vation price’. That is, the highest price that a given person will ac-
Method of deducing the value marginal product of water used to cept and still purchases the good. In this study the reservation
produce an individual crop, grown in a particular region and during price is revealed by assessing the value of the marginal product
a particular season, can be obtained. According to Salvatore (2004) farmers receive from using the good irrigation water alone in the
theoretically each individual crop, season and regional value production of different crops in different regions and seasons.
228 B. Davidson, P. Hellegers / Journal of Hydrology 408 (2011) 226–234
Salvatore (2004, p. 298) suggests that to determine the derived
demand for an input it is necessary to assume that the firm will use
the amount of each input in such a way that maximizes its profits.
To do this the firm must produce the optimal level of output with
the least cost combination of inputs. The firm will employ each in-
put as long as the extra income from the sale of the output (known
as the marginal revenue product or MRPi) produced by the input is
larger than the extra cost of the input. The marginal revenue prod-
uct (MRPi) of each input is equal to the marginal product of each
input (MPi) multiplied by the marginal revenue of the output
(MRx), and in a perfectly competitive environment the marginal
revenue of the output should equal the price of the output (Px).
The value of the marginal product of each input (VMPi) must there-
fore equal the marginal revenue product of the input in this situa-
tion, which in turn is equal to the marginal product of the input
multiplied by the price of the output, or
VMPi ¼ MPi Px ¼ MRPi
As more units of the input are added the marginal product of
the input must eventually decline and Salvatore (2004, p. 298) arg-
ures that this declining portion of the marginal revenue product
schedule is the firms demand schedule for the input in question.
However, this would only be the case if the firm was assumed to
employ only one variable input (i). The use of multiple variable in-
puts means that any individual marginal revenue product curve
could shift as the price of any variable input changed. A similar
problem occurs when attempting to move from the firm level to
the market demand for the input. If the price of an input changes,
all firms in the market will react, producing a different quantity of
the output and having what is known as an external effect on the
firm and the price in the market. Both these impacts would mean
that the derived demand for any input would become the loci of
points on different marginal revenue product curves, where the
value of the marginal product lies on that input demand curve
(Salvatore, 2004, pp. 299–300).
For each individual input used, the value of the marginal prod-
uct for the last unit employed must lie on the market derived de-
mand schedule for it, provided that it is assumed that a perfectly
competitive environment exists and that the firms operate under
the assumption that constant economies to scale occur. Thus, in
this study if the value of the marginal product can be calculated
on the value of the last unit of water used, it provides one point
on the overall input demand schedule for water, a point that corre-
sponds to the demand for water for that output. By calculating the
value of the marginal products of water used for different outputs
(in different locations and seasons as well), all which theoretically
should lie on the demand curve for the input, it should be possible
to derive the input demand for water.
As water is just one input into a production process, the de-
mand for it should also accord with that of an input demand. In
such cases the quantity of the input demanded has a number of un-
ique theoretical aspects. First, the relationship between the price
and quantity of water demanded must be a negative (downward
sloping) one. Second, the price of the output produced from the in-
put water, the price of other inputs and the price of substitutes to
water are hypothesized to be important in determining the input
demand for a good as suggested above (Varian, 1987).
The own-price elasticity of demand is an important variable as
it summarizes the responsiveness (or sensitivity) of the quantity
demanded to a change in its price.
ed ¼ ðDQ w =Q w Þ=ðDPw =Pw Þ
where ed,i is the own-price elasticity of demand for irrigation water;
Qw is the quantity of input w; and Pw is the value of the marginal
product of the input w.
There are numerous methods available to estimate the own-
price elasticity of demand for a good, none of which are really ame-
nable to the case of irrigation water. Most involve the collection of
market prices and quantities for a good, or a range of goods, and
then estimate the relationship between the two. In this case the
demand for the good could be expected to be a function of its price,
where the slope (the coefficient associated with the price) is nega-
tive and significantly different to zero and the intercept term is
large and positive. To estimate the own-price elasticity of demand
the slope coefficient of the demand curve (b) is multiplied by the
ratio of the quantity demanded to the price at any point along
the curve.
ed ¼ b  Q w =Pw ð3Þ
More typically, and the method used in this study, transforming
the quantities demanded prices into logs and estimating the rela-
tionship by regressing one on the other will yield an estimate of
ð1Þ
the elasticity (see Tomek and Robinson (2003, p. 361), for an ex-
panded discussion on this practice).
4. Previous estimates
Many researchers have used mathematical programming mod-
els to estimate the elasticities of irrigation water whereby a hypo-
thetical farm is assumed to exist and the model is simulated with
different constraints to determine the marginal value, or the sha-
dow price, of water (see Appels et al., 2004; Scheierling et al.,
2006). Others have attempted econometric evaluations and even
field experimentation.
Scheierling et al. (2006) reviewed a total of 53 studies of esti-
mates of the own-price elasticity of demand for irrigation water.
They reported estimates ranged from 0.002 to 1.97, with a
mean of 0.51 and a median value of 0.22. In total, 11 mathemat-
ical programming studies were assessed and 21 estimates ob-
tained, 4 econometric studies were reviewed with 22 estimates
being obtained and 3 obtained estimates from field experiment
studies to obtain 10 estimates of the own-price elasticity of de-
mand for irrigation water. One might suggest that any elasticity
obtained should fall between the ranges found by Scheierling
et al. (2006) and it should not fall far from their estimated mean
of 0.5.
However, large differences could well occur. For instance, in an
Australian study of short run elasticity of demand for irrigation
water across crops, Bell et al. (2007) found elasticities to range
from 0.8 for the fruit and vegetable industry groups to 1.9 for
sugar. These estimates are less elastic (lower in absolute terms)
than others reported in other Australian agriculture (see Appels
et al., 2004). These estimates were derived at the farm level using
panel data of the profit functions of individual producers and the
water prices used were those that farmers pay for water.
These highly synthesized methods (programming models and
Meta techniques) are inadequate as they do not necessarily allow
for the diversity of options open to a range of farmers and enter-
prises, spread over a wide area. Scheierling et al. (2006) compare
estimates across studies which are based in different regions, while
Bell et al. (2007) make comparisons across commodities in differ-
ent catchments. The modeled farm approach described in Appels
et al. (2004) does neither of these things. It is also assumed in these
approaches that all farmers will act in the same manner and in a
rational way, with perfect knowledge and foresight, actions which
ð2Þ are hypothesized by the analyst alone to exist. Vinot (2009), Molle
et al. (2009) and Hellegers and Davidson (2010) all explain why
this might not be the case. They suggest that farmers plant differ-
ent crops for a variety of reasons, some for a financial return and
others for sustenance. This implies that if water is restricted in
 B. Davidson, P. Hellegers / Journal of Hydrology 408 (2011) 226–234
the region, then the crop with the lowest value is probably not the
one sacrificed because of a lack of water alone.
To put this argument another way, it could be suggested that
the estimates of the own-price elasticity of demand that have been
derived from programming models are dependent on assumptions
beyond those normally associated with profit maximization and
the economic efficiency of an input. They are based on additional
assumptions imposed by the analysts on what they perceive as
the users actions with respect to different circumstances. What
are required are estimates that adequately reflect the circum-
stances and situations the users of an input face. This can only be
derived from an assessment of the outcome from a productive pro-
cess, where the values of the marginal products of water are de-
rived from the actions of users in the field. Such an approach is
detailed in the next section, which relies on calculating the value
of the marginal products and using that in accordance with the
assumptions specified in Section 3.
5. Methods
To estimate the demand function for irrigation water, it is nec-
essary to obtain an estimate of the marginal value farmers place on
irrigation water. This will vary according to the use farmers put the
water to, the output prices received for the chosen use, the way
water is applied to individual crops and how it is combined with
other inputs. Thus, a range of values for different crops in different
regions and seasons will need to be obtained. Taking this approach
also yields a set of estimates that can be used to conduct an ordin-
ary least squares regression analysis over the obtained values of
the total demand for irrigation water.
The approach used in this article to determine the disaggregat-
ed value of the marginal products of irrigation water used in agri-
culture across crops, regions and seasons is the Residual Method,
described by Young (2005), and detailed in Davidson et al. (2009)
and Hellegers and Davidson (2010). While this method has its lim-
itations (in particular that it tends to overestimate the value of
water), both Young (2005) and Griffin (2006) attest to the useful-
ness and reliability of the approach. This method relies on the va-
lue to a producer from producing a good (its price by its quantity)
being equal to the summation of the quantity of each input re-
quired to produce it multiplied by each inputs corresponding mar-
ginal value of the product:
Y i Pi ¼ RQ j;i VMPj;i
where Yi is the quantity of output of crop i (kg ha1); Pi is the price
received for crop i (Rs kg1); Qj,i is the input j used to produce crop i;
and VMPj,i is the value of the marginal product input j used to pro-
duce crop i.
Expanding the equation to a two input model (v and w), and
assuming that the value of the marginal product of one input (v)
is known but the value of the marginal product of water (w) is
not, yields:
Y i Pi ¼ Q v ;i VMPv ;i þ Q w;i VMPw;i
where Qv,i is the known quantity of input v required to produce crop
i (kg ha1); VMPv,i is the known value of the marginal product of in-
put v (Rs kg1); Qw,i is the known quantity of input w used to pro-
duce crop i (m3 ha1); VMPw,i is the unknown value of the
marginal product of input w (Rs m3); and all other variables are
as defined above.
The value of the marginal product of the unknown input (w) can
be found by rearranging Eq. (5) so it is specified as a function of the
price multiplied by quantity of the output, less the sum of the
quantities of all known inputs multiplied by the values of the mar-
229
ginal products of all known inputs, all divided by the quantity of
the unknown input. In other words:
VMPw;j ¼ ðY i Pi  Q v ;i VMPv ;i Þ=Q w;i ð6Þ
where all variables are as described above.
Young (2005, p. 61) describes the solution to Eq. (6) as the ‘va-
lue of water’ or the ‘net return to water’ per unit of water for the
crop in question. But in doing so, he assumes that the producer
chooses inputs in such a way that the values of the marginal prod-
ucts equals the price of the input. This assumption allows for the
substitution of the values of the marginal products for input prices
and permits the value of the marginal product for water to be equal
to the unknown price. It is, in the parlance of economics, the ‘resid-
ual value’. If the values of the marginal products can be determined
for different crops (i) in different zones (k) and in different seasons
(t) the number of observations required to estimate the input de-
mand schedule for water in a catchment can be increased, as all
should lie on it.
Of interest in this study is not the marginal value of water used
in a particular individual crop, but the marginal values between
different crops, in different regions and seasons. Each individual
calculated value of the marginal product is assumed to lie on the
input demand schedule for water (see Section 3) and as such pro-
vides a point which, when combined with the values of the mar-
ginal product of water used in other crops, seasons and regions
within a catchment, can be used to estimate the whole input de-
mand curve. It should be remembered that the aim in this study
is not to provide an estimate of the own-price elasticity of demand
for irrigation water used in a particular crop, in a single season at a
known location. Rather it is to provide an estimate of the own-
price elasticity of demand for irrigation water over a range of crops,
seasons and locations within a catchment.
The price in this study is what farmers derive in value from
deploying water for different crops in different zones and seasons.
Thus, the demand schedule is the loci of values of the marginal
products farmers derive from deploying water in different uses.
These can be interpreted to be, as Varian suggests, the reservation
price for irrigation water used in different uses, seasons and uses.
In other words, the implicit assumption is that farmers view the
demand for water from highest value to lowest and thus by cumu-
latively summing the quantities employed in this way will reveal
the input demand relationships for water.
ð4Þ
To calculate the input demand schedule it is necessary to order
and collate the various values of the marginal products of water
used to produce different crops in different regions and in different
seasons within a catchment according to the amount of irrigation
water deployed in each use. To view the sort of reservation price
discussed by Varian (1987) the crops are ordered from highest
value of the marginal product to the lowest and then the amount
of water used for each subsequently valued crop is cumulatively
summed according to this order. In doing so, it should be possible
to trace out the input demand for irrigation water in the
ð5Þ catchment.
Usually an elasticity estimate is independent of the units cho-
sen, as the measure of the percentage change in quantity divided
by the percentage change in price. However, in this case the esti-
mated elasticity is not independent of the degree of aggregation
used to order the data. The simple act of splitting the quantity data
into half and ascribing the same marginal values to it will change
the estimate of the elasticity. This is a serious limitation of the ap-
proach, which cannot be easily resolved. The best approach to solv-
ing this problem is to split the quantity data up into as small a set
of units as possible, in order to obtain as many observations as pos-
sible. Doing so will result in an estimate that is more elastic.
230 B. Davidson, P. Hellegers / Journal of Hydrology 408 (2011) 226–234

Fig. 1. An example of the approach used to estimate the demand schedule for irrigation water.

Table 1 Table 2
The values of irrigation water for individual crops in five different zones by season Total quantities of irrigation water applied by crop and zone (MCM). Source: Hellegers
and weighted average values in the Musi catchment 2001–02 (Rs m3). Source: and Davidson (2010)
Hellegers and Davidson (2010)
Crop Zone 1 Zone 2 Zone 3 Zone 4 Zone 5 Total
Crop Zone 1 Zone 2 Zone 3 Zone 4 Zone 5 Average Kharif (summer)
Kharif (summer) Rice 157.14 69.11 76.21 186.91 47.39 536.75
Rice 0 0.11 0.30 0.42 0.01 0.20 Vegetables 5.31 0.19 0.15 0.17 0.36 6.18
Vegetables 106.19 106.07 106.15 106.5 106.36 106.20 Chilli 1.55 1.06 0.44 0.54 0.22 3.81
Chilli 4.55 4.52 4.67 4.83 5.01 4.62 Fruits 16.14 7.70 3.71 13.54 2.76 43.86
Fruits 24.26 24.20 24.37 24.59 24.68 24.39 Ground nuts 0.13 0.33 0.14 1.04 0.02 1.65
Ground nuts 0 0 0 0 0 0 Maize 5.62 0.23 1.27 2.89 0.11 10.12
Maize 22.27 22.01 21.82 22.47 21.83 22.26 Cotton 15.14 11.41 10.54 13.36 3.93 54.38
Cotton 0 2.82 2.96 3.17 0.22 1.96 Other 0.99 0.62 0.28 1.65 0.07 3.60
Other 0 0 0 0 0 0 Total 202.03 90.65 92.73 220.10 54.85 660.35
Average 5.38 2.82 2.05 2.45 2.02 3.31 Rabi (winter)
Rabi (winter) Rice 250.35 133.49 116.40 205.59 88.39 794.22
Rice 0 0 0.04 0.16 0.08 0.06 Vegetables 24.50 0.80 1.21 0.64 4.36 31.51
Vegetables 21.53 21.50 21.68 21.83 22.03 21.61 Chilli 3.19 1.10 0.51 1.18 0.10 6.07
Chilli 1.21 1.19 1.38 1.50 1.75 1.29 Gram 0.49 0.57 0.40 1.09 0.01 2.57
Gram 15.50 15.49 15.66 15.78 16.03 15.65 Ground nuts 2.79 4.62 1.51 11.98 0.18 21.09
Ground nuts 3.75 3.73 3.89 4.04 4.25 3.92 Maize 9.45 5.77 12.24 15.00 0.11 42.56
Maize 3.17 3.14 3.32 3.46 3.67 3.31 Other 0.20 0.00 0.00 0.22 0.00 0.42
Other 0 0 0 0 0 0 Total 290.97 146.35 132.27 235.70 93.15 898.45
Average 1.99 0.43 0.64 0.70 1.13 1.11 Total 493.00 237.00 225.00 455.80 148.00 1558.80
Average 3.38 1.35 1.22 1.55 1.46 2.04

ground nuts. This implies an ordered schedule of demand for water

where the first 10 MCM is valued at Rs. 0.5/m3, 30 MCM is valued
These values of the marginal product and the corresponding
at Rs. 0.4/m3, 130 MCM is valued at Rs. 0.2/m3 and 230 MCM is val-
cumulatively summed quantities of water deployed become the
ued at Rs. 0.1/m3. This would be a stepped equation, which could
basis for the econometric estimation of the input demand for irri-
be smoothed (see Fig. 1). This is the input demand schedule for
gation water and subsequently the estimation of its own-price
water in that region, given the observed use of water on those
elasticity of demand. These data can then be separated into crops
crops. From this demand schedule it would be possible to estimate
where the irrigation water is most highly valued and less highly
the slope and intercept of a function and from that, estimate the
valued. In this approach, it is assumed that farmers act rationally,
own-price elasticity of demand for irrigation water in the region.
wanting to use the first available water to produce the most valu-
Ideally, the curve could be estimated in log form to enable a direct
able crop and so on until all water is expended.
estimate the own-price elasticity of demand for water as suggested
To illustrate this approach, the highest values of the marginal
by Tomek and Robinson (2003) and specified in Eqs. (2) and (3).
products farmers place on water in any system are often for vege-
tables (at say Rs. 0.5/m3), fruits (at Rs. 0.4/m3) then to grains (at Rs.
0.2/m3) and then to ground nuts (at Rs. 0.1/m3). These values are 6. Analysis and results
Varian’s (1987) ‘reservation prices’. Then, if it is assumed for illus-
trative purposes that 10 MCM (million cubic metres) is used for Data on values and the quantities of water deployed in the Musi
producing vegetables, another 20 MCM to produce fruit and a fur- catchment of India were derived from Davidson et al. (2009) and
ther 100 MCM is used to produce grains and ground nuts, each. The Hellegers and Davidson (2010). In this study the values the mar-
pattern of rational water use would be to use the first 10 MCM to ginal products of individual crops grown in different parts of the
produce vegetables, the next 20 MCM to produce fruit, the next catchment in different seasons were estimated. The social prices
100 MCM to produce grains and the final 100 MCM to produce (those that account for and exclude the impacts of taxes and
 B. Davidson, P. Hellegers / Journal of Hydrology 408 (2011) 226–234
5
4.5
Average value (Rs./m3)
4
3.5
3
2.5
2
1.5
1
0.5
0
0 200
Cumulative irrigaiton water applied (MCM)
Fig. 2. Ordering of the crops from highest average value (Rs m3) to the lowest and the associated cumulative water use (MCM). Source: Hellegers, P., Davidson, B., 2010.
Determining the disaggregated economic value of irrigation water in the Musi catchment in India. Agricultural Water Management 97 (5), pp. 933–938.
subsidies) were used. In estimating these values, Hellegers and
Davidson accounted for and measured the impacts changes in
the prices of outputs and other inputs. These estimates were sub-
jected to a set of sensitivity tests, where it was found that the out-
put prices affected values most. If the output and other input prices
were altered, the values of the marginal products for each use of
water would change. The cross price elasticities of water and other
inputs could be calculated by altering the input prices within Hel-
legers and Davidson’s analysis, something that is beyond the scope
of this paper. By not doing so, only the short run elasticities of the
demand for water are calculated in this study. Ordering all the
crops produced in all the zones (specified in Table 1) from highest
to the lowest and by cumulatively summing the associated quanti-
ties of water (specified in Table 2) according to the order of
descending value, is shown in Fig. 2.
It should be noted that these values of the marginal products of
water would be at the upper limit of any estimate as a limitation of
the Residual Method is that any input not included in the analysis
is attributable to the input under consideration (see Young, 2005;
Hellegers and Davidson, 2010). In this case the estimated values
are relatively low. In total there are 75 observations (eight crops
in Kharif or summer season and seven crops in Rabi or winter sea-
son in each of the five zones of the Musi catchment, as defined by
George et al. (2011). For reasons of exposition, the crops which
have a value of the marginal products of more than Rs. 5/m3 (26
observations) are not shown in Fig. 2. The crops not shown repre-
sent only 6% (or 94 MCM) of the total allocated quantity of water
(of 1559 MCM). There are 19 observations that have a value less
than zero. In these cases, the production of the particular crop
was undertaken at a loss, not a surprising result given that the
influences of subsidies were removed from the analysis (see
Davidson et al., 2009). Further, it should be noted that making a
loss is a perfectly reasonable outcome from this market process.
As it is impossible to obtain a logarithm of anything but a positive
number, these 19 observations were excluded from the economet-
ric analysis. However, as the water is used to produce output, their
employment has an economic interpretation. For these 19 observa-
tions the elasticity was logically determined to be perfectly elastic,
as they are unresponsive to a change in price and are ordered along
the quantity axis. They represent 36% (or 561 MCM) of the total
allocated quantity of water in the catchment.
To directly estimate the own-price elasticity of demand for
water applied of the 56 usable observations, which represent a sig-
nificant proportion (approximately 64%) of the water used in the
catchment, the logarithmic values of quantities and average values
were obtained and regressed against one another using the ordin-
ary least squares estimator in Microsoft’s Excel program. A loga-
rithmic functional form was chosen after a visual inspection of
the data (see Fig. 2) revealed that it would provide the best fit
231
400 600 800 1000 1200 1400 1600
for the estimated equation and because it is the most direct meth-
od of obtaining an estimate to the own-price elasticity for irriga-
tion water. In addition, a logarithmic function form is consistent
with the idea that farmers would value the small amount of water
used in high value crops disproportionally higher than a large
quantity of water used on less valuable crops. The implication for
using this type of functional form is that the elasticity is constant
over the whole range of data estimated.
Using all the data available for all crops across all zones during
all seasons in the Musi catchment (i.e. all 56 usable observations),
the following regression equation was estimated:
ln Q w ¼ 5:494  0:640 ln Pw
ð35:33Þ ð10:67Þ n ¼ 56 F ¼ 113:76 R2 ¼ 0:62 ð7Þ
where Qw is the cumulative ordered quantity of water employed in
producing each individual; Pw is the value of the marginal product
of water used in that product; and the figures in brackets are the
Students-t statistics.
It would appear that the aggregate own-price elasticity of de-
mand for irrigated water in the Musi catchment is equal to
0.64. In other words for every 1% increase in the value of the mar-
ginal products of water, the quantity demanded would decline by
0.64%. The parameter estimates are correctly signed (negative
and a necessity as water is an input demand). In addition, with
an adjusted R2 of 0.62, it would appear that the relationship is ade-
quately explained. The Students-t statistic of 10.67 on the value
of the marginal product coefficient would suggest that the esti-
mate is significantly different from zero.
To assess whether the elasticities might well be different for
crops in which irrigation water is either highly valued or less val-
ued (designated by the subscripts h and l respectively), the 56 use-
able observations were segregated into two somewhat equal parts.
It should be noted that a Spline regression technique could have
been used at this point in the analysis to estimate linear slopes
for different ranges of the independent variables. Using a Spline
technique could be considered to be more statistically efficient;
however such an approach would not conform with the a priori be-
liefs revealed in a visual inspection of the data.
Crops that were found to value irrigation water greater than
Rs. 15/m3, (25 observations representing only 6% of the water de-
ployed), were used to estimate the following regression equation:
ln Q h ¼ 10:482  2:122 ln Ph
ð12:66Þ ð8:78Þ n ¼ 25 F ¼ 77:02 R2 ¼ 0:77 ð8Þ
The remaining 31 observations, all having an estimated positive
value of Rs. 5.01/m3 or less, and accounting for 58% of the water
used, were employed to estimate the following regression equation:
232 B. Davidson, P. Hellegers / Journal of Hydrology 408 (2011) 226–234
ln Q l ¼ 5:439  0:444 ln Pl
ð154:61Þ ð20:75Þ n ¼ 31 F ¼ 430:41 R2 ¼ 0:94 ð9Þ
As was the case when all the 56 positive observations were as-
sessed (designated as w and presented in Eq. (7)), in the equations
for the higher valued crops (designated as h and presented in Eq.
(8)) and the lower valued crops (designated by l and presented in
Eq. (9)), the estimated coefficients on value were found to be sig-
nificantly statistically different from zero and correctly signed.
The estimated equations are significant and the goodness of fit sta-
tistic reveals even better estimates that the aggregate estimate see
Eq. (7)). Most importantly, all three estimates of the elasticities,
and what can be implied from the data excluded from the process,
are all different.
According to the theory the demand for an input is sensitive to
changes in output and other input prices. Changing these elements
results in parallel shifts in the demand equation, rather than
changes in the elasticity estimates, something that would require
re-estimating the values of the marginal products, which is beyond
the scope of this study. Thus, what changes is the amount of irriga-
tion water that falls in each of the three elasticity ranges. Hellegers
and Davidson (2010) reported the estimated values were most sen-
sitive to changes in output prices. They concluded that a 30%
reduction in output prices resulted in 87% of irrigation water being
found to be in the perfectly elastic range and valued at zero, while
10% was in the elastic range and only 3% in the inelastic range. This
can be compared with the situation presented above where 64%,
36% and 6%, were found to be in the perfectly elastic, elastic and
inelastic ranges (respectively). If output prices increase by 30%
then the amount of water in the perfectly elastic and elastic ranges
change down to 10% and up to 84%, respectively, while the inelastic
range remains unchanged at 6%.
The estimates of the own-price elasticities of demand for irri-
gation water in the Musi catchment yield an interesting set of
circumstances. If taken over the whole range of data (all 75
observations) three different estimates can be derived. First, for
the 25 crops where water is valued most highly, an elastic esti-
mate, of 2.1 was estimated. Second, for the next 31 crops,
where water is less valued, the estimate was found to be fairly
inelastic at 0.44. Third, combining these two sets of observa-
tions together (56 in all) to obtain the overall own-price elastic-
ity of irrigation water, an inelastic 0.64 estimate was obtained.
The estimated elasticities are in the range of those found by
Scheierling et al. (2006). Finally, it was logically asserted that
for approximately 36% of the water used in the Musi catchment,
that which was found to have a residual value of equal to or less
than zero, the own-price elasticity of demand was perfectly
elastic.
7. Limitations of the approach
The results obtained in this study can be questioned on a num-
ber of broad fronts, any of which relate to the assumptions speci-
fied above. The most important relates to the well known
problems of obtaining values using the Residual Method (that
the figure includes everything that cannot be accounted for else-
where). This leads to the suggestion that the value figure obtained
is too high. Yet what should be noted is that the estimates of the
values of the marginal products used in the analysis are not very
high.
Further, the variability in the resultant values need to be ques-
tioned, as some are abnormally high and others are very low or
negative. Barton and Taron (2010) compared the value of the mar-
ginal products of water obtained using trading prices with surveys
of value and with that obtained from the Residual Method in the
Tungabhadra River in India. They concluded that the Residual
Method showed greatest variation. This led them to conclude that
the Residual Method is not as useful and that the resultant esti-
mates of demand could be misleading. While Hellegers and
Davidson (2010) mount a vigorous defense of their results, these
criticisms reach into the heart of the approach that is applied in
this case. That is, is it better to take a highly disaggregated ap-
proach to assessing the demand for irrigation water, as pursued
in this study, or to take the hypothesized simulated approach used
by others? The point being that Barton and Taron made their judg-
ment on finding a single estimate, something that in a catchment
with many different characteristics, would appear to be illogical.
What cannot be ignored in this study are the numerous
assumptions that have been made that force the values of the mar-
ginal product of water used to produce individual products, in a
particular season and region. In particular, it was assumed that
perfect competition existed and that farmers produced under a re-
gime of constant returns to scale. Both these assumptions are
highly dubious.
Calculating a price elasticity of demand is not independent of
the institutions which control the allocation of water, as those
institutions may well prevent water travelling from a place where
it is not highly valued to one where it is. Not accounting for all
transactions costs in reallocating water will have the same effect.
Institutional rules break down the assumptions of perfect compe-
tition, just as decreasing and increasing returns to scale do, result-
ing in the values of the marginal products not lying on the input
demand schedule for water. While in this study an attempt was
made to use estimates of the values of the marginal products that
excluded subsidies and taxes, a fact that resulted in a number of
the estimated values of the marginal products being negative,
not all institution influences can be accounted for.
Within an assumption of a perfectly competitive environment
are two elements that have an important bearing on the findings.
First, profit maximization is assumed. This leads to the second
assumption that producers would order requirements from highest
to lowest value. There is nothing to suggest that farmers operate
under these beliefs, especially in developed countries, as issues of
subsistence intrude. Third, given this, it could be argued that farm-
ers attempt to maximize their utility, rather than their profits.
Another limitation identified with this approach is that the esti-
mated elasticities would appear to be dependent on the method of
aggregating the quantity data together. By cumulatively summing
the quantities in a finer graded scale tends to make the estimate
more elastic. There is little that can be done to overcome this lim-
itation, other than to be aware of it. In this study the quantities
were segregated according to the region, crop and season in which
they were grown, implying that the value of the marginal product
for water in each is perfectly elastic. As a consequence, the demand
function would be stepped in shape, not smoothed, as was sug-
gested in this study. Further insights into this problem can be
gained from studying the literature on labor economics, a field that
concentrates on input values and use.
In this study the logarithmic functional form was implied and
used to estimate the elasticities. It should be noted that any esti-
mate is dependent on the chosen functional form. The one used
in this analysis was chosen from visual inspection of the data
and for convenience. However, such a choice implies that the elas-
ticity is constant over the whole range of the observed data. This
might not be the case and given that in segregating the data into
high and low value groups resulted in two very different estimates.
Finally, it could be implied that some degree of endogeneity
may exist in the estimation procedure. Endogeneity may occur be-
cause in deriving the value of the marginal products using the
Residual Method relies on dividing each estimate by the quantity
of water (see Eq. (6)) and that this quantity now appears on both
 B. Davidson, P. Hellegers / Journal of Hydrology 408 (2011) 226–234
sides of Eq. (7). In reality this is not a serious concern as the quan-
tity used in the estimation procedure is the cumulative sum of
water used, not the actual sum. If, in cases where great degrees
of aggregation are not possible and few observations exist with a
small total quantity of water deployed, it may be advised to under-
take a statistical test for endogeniety and to adjust for it.
The results reported in this study must be interpreted with care.
They all allude to further research that could be undertaken in this
field. In particular, there is a need to work on the impacts that
motivate farmers to produce a crop for sustenance over profit
and a more comprehensive study of the institutional constraints
to moving water between uses, regions and seasons. Despite these
limitations, which it should be noted exist in many studies on the
input demand for water, the estimates obtained in this study are
considered superior to others as at least they reflect the choices
farmers directly make, rather than those that analysts might think
that they make. They could be used in conjunction with other esti-
mates derived using other approaches, in order to improve the
understanding of the demand for water.
8. Discussion and conclusions
It has been argued throughout this study that those who need to
investigate the problems of valuing water and/or of estimating the
own price elasticity of demand for water need to attempt the task
on an individual crop basis, in an individual region over different
seasons. Doing so reveals a highly variable result across crops in a
single year. If the value of water and its resulting elasticity is deter-
mined in aggregate, which is usually the response from other ap-
proaches, the precision needed to understand the changes that
will result from in supply can be lost. These aggregate estimates
are (according to Scheierling et al. (2006)) usually based on a linear
or quadratic programming models in which the region/farm is as-
sumed to maximize profits from the use of a set quantity of water
provided at a given price. The process of optimization embodied in
these models forces the value of water to be equal across crops, as
that is the variable that is simulated to change. In these other studies
it is suggested that the limiting variable is water, so applying water
to each crop so that the marginal values from each are equal, forces a
result that there would only be a single average elasticity value of
water, regardless of the crop produced. This can only be correct in
the highly theoretical world of optimization models, as farmers do
not view it this way and change the way they allocate water.
Underlying all these other approaches to estimating the de-
mand of water is similar data that has been employed in this study.
It is all about discerning the value of water by taking the costs by
the quantities of the inputs from the price of the output by the
yield produced. The modeling philosophy is different in this study,
as the aim is to disaggregate water by the output resulting in the
estimation of the different responses (revealed in the different
elasticities). In the other studies the differing values of water used
in different crops are, by assumption, made to equate.
From the sensitivity tests conducted by Davidson et al. (2009), it
can be concluded that the estimates of the values is highly sensi-
tive to changes in commodity prices. It could be argued that water
values (and what farmers are willing to pay for it) are determined
mainly by commodity prices. So can output or commodity prices
act as a proxy for water values and by implication is the own-price
elasticity of demand for water used in a particular crop in a partic-
ular region at a specified time, equal to that of the crop in ques-
tion? This is an area that requires further investigation. Other
factors come into play, especially those at the farm level. Thus,
the type of estimates obtained by Bell et al. (2007), where more
elastic estimates of water prices elasticities were obtained from
crop profit functions, could be questioned.
233
By ordering the data in the way described above over a range of
crops grown over a wide area and in different seasons, it was pos-
sible to obtain an estimate of the own-price elasticity of demand
for irrigation water in the Musi catchment of approximately
0.64 in aggregate. This estimate is well within the ranges speci-
fied in Scheierling et al. (2006) and not that different to the average
they obtained of 0.51. There are no ‘simulated values’ from mod-
els of ‘hypothetical’ farms that optimize water use in the approach
specified above. Rather the observations of values of the marginal
products for water used, and the own-price elasticities that are de-
rived from them, are based on observed situations of water use
across a region over a wide variety of crops grown in different sea-
sons. Thus, they can be considered to be superior, as they reflect
the actions of those who use the resource.
However, a wider question still exists: Do farmers faced with
water shortages act rationally cutting the crop that pays the lowest
value per unit of water. In many cases in the developed world this
may well be the case. Conversely, in India and the rest of the third
world where a high proportion of crops are produced and con-
sumed on a subsistence basis, this approach can be questioned.
Growing cash and higher valued crops is inherently more risky
when water is in short supply. Producing a crop that you know will
feed you and your household for another year is a more rational
approach. The other approaches to estimating demand for irriga-
tion water, especially the programming model approach, only take
account of the financial returns to the crop as a whole. In reality
other concerns apart from financial ones, like crop rotation and
being self sufficient, also play a role and these also need to be
investigated.
Acknowledgements
This research was funded by the Australian Centre for Interna-
tional Agricultural Research. The authors are grateful to the com-
ments received from two anonymous reviewers and as a result
have altered their approach significantly. Despite their best efforts,
any remaining errors are the sole responsibility of the authors.
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