| Summary: | The reform of water management in China is still in progress, and the pricing of water resources is undertaken in parallel, with a divide between irrigation water and pipe water associated with different users: The supply of irrigation water is regulated by local government and that of pipe water is operated by the production sector of pipe water. Based on a literature review and an interview survey of farmers, this study incorporated the water parallel pricing system of China within a computable general equilibrium (CGE) model, where the drought of 2000 is simulated. The 16 provincial irrigation water supplies and their subsidies were also estimated and introduced into this CGE model. The results demonstrated that the effects on the macro-economy were insignificant. However, the effects on agricultural production, particularly on farming production mainly cultivated in northern areas, were significant. Most farming production sectors employed more capital and labor to prevent losses in output from drought. Agricultural labor was shifted from non-farming agricultural production sectors into farming. Both urban and rural households suffered severe losses in welfare and food consumption, even though they benefited from the additional income. Moreover, rural households suffering the worst losses were located in both northern and southern areas.
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