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Abstract
In this paper we examine the effects of energy prices on groundwater extraction
using an econometric model of a farmer’s irrigation water pumping decision that
accounts for both the intensive and extensive margins. Our results show that
energy prices have an important effect on both the intensive and extensive
margin. Increasing energy prices would affect crop selection decisions, crop
acreage allocation decisions, and the demand for water by farmers. Our estimated
total marginal effect, which sums the effects at the intensive and extensive
margins, is that an increase in the natural gas futures contract price of 1 cent/1000
btu would decrease water extraction by an individual framer by 102.88 acre-feet
per year, which is approximately 63% of the average amount pumped in a year by
a farmer.