Economic Impact of Water Scarcity

What is the economic impact of water scarcity? The World Resource Institute projects that 44 countries experience high or extremely high water distress in 2040. We assess the economic impact of water scarcity on land valuations. This Ricardian approach is commonly used in the literature to assess the impact of climate change. Specifically, we focus on farmland valuations in California—one of the most productive farmlands in the world. The semi-arid climate makes its valuation particularly sensitive to the amount of surface and groundwater water available for irrigation. The detailed administrative transaction data from the counties’ assessor offices allows us to estimate repeat sales indices as opposed to a hedonic model which make our results less likely to be affected by omitted variables. We find that parcels with better access to freshwater see a 24.9%-25.9% larger appreciation in land values per acre over the time period from 2011 to 2020 depending on the exact specification; we find no statistical significant differential price change between 2000-2011. The differential change in land values points towards large economic effects of water scarcity with beliefs about future climatic conditions being updated due to two severe episodes of drought and signals of legislative willingness to curb groundwater overdraft