Is irrigation water price an effective leverage for water management? An empirical study in the middle reaches of the Heihe River basin

• We estimate the price elasticity of agricultural water demand in Zhangye city.
• Current irrigation water price elasticity is statistically significant but very low.
• Farmers’ response to current price increase is intrinsically weak.
• Surface irrigation water price increase may lead to over-withdrawal of groundwater.
• Hybrid strategy to improve irrigation efficiency is essential to water management.

Serious water scarcity, low water-use efficiency, and over-exploitation of underground water have hindered socio-economic development and led to environmental degradation in the Heihe River basin, northwestern China. Price leveraging is an important tool in water demand management, and it is considered to be effective in promoting water conservation and improving water use efficiency on the premise that water demand is elastic. In the present study, we examine whether price is an effective and applicable instrument for restraining the increasing demand for agricultural irrigation water in the middle reaches of the Heihe River basin and how will it affect farmers’ decisions on irrigation and crop structure. Specifically, the price elasticity of agricultural water demand was estimated based on the irrigation water demand function. The results show that the agricultural irrigation water price is statistically significant, but its elasticity is very low under current low water price. Price leverage cannot play a significant role in the context of the current pricing regime and farmers’ response to price increase is intrinsically weak. To create incentives for conserving water and improving irrigation efficiency, price mechanism should be accompanied with clearly defined and legally enforceable water rights, restricted water quota measures, and reform of water authorities and water-user associations. Furthermore, increases of surface irrigation water price may lead to the over-withdrawal of groundwater, consequently, effective groundwater licensing and levying must take place to limit the total volume of groundwater withdrawal. In all, improving irrigation efficiency through better management and the adoption of water-saving technologies is the ultimate way to deal with the challenges facing irrigated agriculture in the middle reaches of the Heihe River basin.