About one-third of the welfare loss is attributed to less efficient
resource allocation (both for water and non-water resources),
while the rest is attributed to the reduced water availability for
irrigation. The latter is not surprising, given the reduction in supply
of irrigation water in many regions. Although irrigation contributes
to only 20% of total crop evapotranspiration, in many parts of
the world irrigation is supplementary to precipitation, which
means a small amount of irrigation may lead to significant increase
in yields (Molden, 2007). The former, however, is a little
complicated because inefficiency occurs both in regions with
and without irrigation reduction, but for different reasons. The
intuition behind the welfare change associated with resource
allocation is that, increasing (decreasing) the level of a subsidized
(taxed) activity will tend to harm the economy, since it further
encourages the inefficient resource usage that already exists under
the protection of subsidy. Agriculture in the US and EU was
subsidized, but was taxed in China at the time this data base was
constructed. Thus, future irrigation shortfalls shift agricultural
production toward relatively high cost regions where farming is