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This paper 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 post-treatment 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.

Effective management of water resources requires signaling the scarcity value of water to society. However, accurate signaling is often limited by incomplete and/or untimely accounting of hydrologic stores and flows of water. In this opinion piece, we advocate an incisive yet conceptually simple framework for transparent, real-time accounting of water stores and flows, including both groundwater and surface water, to inform water markets organized around a central clearinghouse. This framework promotes forthright collaboration among disciplines to improve system efficiency and increase water-management transparency. We use California water management as an example for the potential for a central clearinghouse framework that has proven so beneficial to transparency of energy markets in that region. [ABSTRACT FROM AUTHOR]