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Abstract

If agricultural drainage from an area imposes costs on society through damaging the environment, and if the measurement of the drainage discharged from each plot in the area is too costly, then it may be necessary to control the drainage by regulating the irrigation tariffs levied on agricultural producers operating there. The purpose of this paper is to analyze how, in such a situation, the regulator of the irrigation tariffs can control drainage and enhance social welfare by using increasing block tariffs for irrigation water. This paper first explains irrigation technology choices by producers and the social costs of their water application when a linear tariff or two-tier increasing block tariff is used to charge for irrigation water. It then examines how variations in the tail block rate of the increasing block tariff affect social welfare, changing agricultural production decisions. When a two-tier increasing block tariff is used to price irrigation water, there can be land areas where producers apply larger volumes of water using traditional irrigation technology. In such a case, it is possible that rises in the tail block rate of the increasing block tariff induce the producers in the area i) to employ modern irrigation technology instead of traditional irrigation technology, or ii) to reduce water application while continuing to use traditional irrigation technology. This paper clarifies what conditions are sufficient for these effects of rises in the tail block rate to contribute to the enhancement of social welfare. The paper also deduces sufficient conditions for the existence of an increasing block tariff for irrigation water that yields a level of social welfare higher than a given linear irrigation tariff. A numerical simulation is conducted to illustrate how two-tier increasing block tariffs can raise social welfare with the above effects.

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