Search

This study evaluates own-price dynamics in taxing environmental externalities. We exploit a natural experiment that exposed some firms to a large and persistent price increase for groundwater, a setting characterized by incomplete markets. Using five years of posttreatment data on farm-level water use, we find that water conservation doubles between the first and fifth year of the tax. Failure to account for dynamics in policies designed to manage groundwater will mischaracterize the price elasticity of demand and introduce efficiency costs.