This contribution presents an exploratory analysis of the microeconomics of deficit irrigation (DI) as a technique with growing prevalence in water scarce areas. DI consists of the application of irrigation doses below the total irrigation requirements throughout the crop cycle and it has a significant impact on water demand for irrigation at both an individual level and at basin scale. We analyze farmer decisions based upon their subjective beliefs about water production function that farmers could attribute to this technology.
Our study is constructed upon the following hypotheses, concerning the impact of DI on the microeconomics of water demand:
In order to test the above-mentioned hypotheses, we surveyed farmers of irrigated intensive olive groves located in southern Spain in order to determine: (1) whether farmers have rational expectations regarding the water-yield relationship; (2) whether the decisions regarding the level of water use correspond to the maximization returns for water or, conversely, whether farmers behave as if they are maximizing returns for land; (3) whether threshold estimates, obtained through the elicited marginal product values of water, imply water pricing ineffectiveness.
The analysis of our case study in southern Spain, as it may also occurs in other arid regions of the world, shows that DI and high-tech irrigation are adopted by farmers as a response to water scarcity. The dynamic nature of water policy means that these technologies, which can be labelled as water saving techniques, have a relevant impact on the farmers’ decision process about the applied water doses and the structure of the water demand. The paradox is that after the adoption of these technologies, water demand does not respond to marginal changes in water price. Consequently, water pricing becomes an ineffective instrument, while farmers optimize water use through the maximization of returns for water. These results are of great importance for the governance of water resources in areas where DI is widespread.
We should mention that in 2010–2015 southern Spain produced around 50% of total world olive oil production, so the area under study is the most important in this sector worldwide.