In a dry region where water is scarce, the government begins to supply free electricity for pumps and free canal water to farmers. Going by the idea that prices act as signals, which outcome is most likely?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Farmers grow water-intensive crops, as the zero price no longer reflects scarcity.
A price signals scarcity. When water and power are free, the price no longer shows that water is scarce, so farmers use it wastefully.
Option (1) Farmers grow crops suited to the dry region, as their costs of farming fall. — Incorrect. Farmers grow suitable crops when water is priced to reflect scarcity, not when it is free.
Option (2) Farmers use water with greater care, as free supply makes them aware of scarcity. — Incorrect. Care comes when the price rises with scarcity. Free supply hides it.
Option (3) Water use stays the same, as prices signal only the supply of a good, not its use. — Incorrect. Price signals change behaviour: people decide how much to use from the price.
Option (4) Farmers grow water-intensive crops, as the zero price no longer reflects scarcity. — Correct. This further depletes the region’s scarce water.
NCERT (2026-27): “Box 2.6: Prices as Signals … Some economists point out that subsidies do not allow prices to indicate the supply of a good. When electricity and water are provided at a subsidised rate or free, they will be used wastefully without any concern for their scarcity. Farmers will cultivate water intensive crops if water is supplied free, although the water resources in that region may be scarce and such crops will further deplete the already scarce resources. If water is priced to reflect scarcity, farmers will cultivate crops suitable to the region. …” |