The Impact of Water Pricing and Subsidies on a Utility Function for the Adoption of Agricultural Water Conservation

ABSTRACT This study investigates how water pricing subsidy mechanisms affect the adoption of watersaving technologies in agriculture, with a focus on China. Using a dynamic decision‐making model based on Markov chains, we examine farmers' intertemporal choices under varying policy configurations. The analysis accounts for regional disparities in agricultural conditions and pricing structures. The results indicate that water pricing policies, when coupled with explicit subsidies, substantially increase the adoption of water‐saving technologies, especially in regions with severe water scarcity or high infrastructure costs. Both ex ante and ex post subsidies are found to be effective; however, ex ante subsidies yield greater adoption rates in areas with high upfront investment requirements. The findings underscore the importance of subsidy design in shaping long‐term adoption behaviour, highlighting the need for tailored pricing and subsidy policies to optimize water conservation outcomes. Policy recommendations are proposed to refine the pricing mechanism and subsidy structures, aiming to balance short‐term financial incentives with long‐term water conservation benefits.