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In the hard rock areas of India, overdraft of groundwater has led to negative externalities, increases costs of groundwater irrigation and causes welfare losses. Groundwater markets are slowly emerging as niche markets to improve water distribution and to mitigate water scarcity by stimulating more efficient use. A sample containing water sellers, water buyers and control farmers was collected to test the hypothesis of more efficient water use. The effect of groundwater market introduction on the efficiency of water use is studied using Data Envelopment Analysis (DEA). The calculated subvector efficiencies for water use show that water buyers use water most efficient. But also water sellers are more efficient in their water use than the control group. Differences in average efficiency between these groups are shown to be significant using a Kruskal-Wallis test. This finding confirms that groundwater markets can add to improving efficiency of water use. Moreover results indicate that the existence of groundwater markets offers access to groundwater to resource poor farmers, the opportunity to benefit from the improved agricultural productivity generated by irrigation. In the light of proposed changes in groundwater legislation and policies for improving water use efficiency these empirical results provide crucial information to policy makers.


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