The Impacts of Water Management Policies on Agricultural Production in Australia - An Economic Analysis

In the Australian Murray-Darling Basin (MDB) the combination of severe and prolonged droughts and historic water management decisions to divert water for cultivation stressed water resources in such an intensive manner that wetlands went dry and rivers are now far from a natural flow. More appropriate water management policies must be implemented to restore ecological function. However, with 39 % of Australia’s total value of agricultural production, transitions in use need to be managed to minimise economic and social impacts on basin communities while they adjust. Recent studies estimate that industries with high water usage but lower or more volatile value products will be impacted more than higher value products. Therefore, this study’s focus is to analyse different water management policies and their impacts on agricultural production, particularly changes in production of water low value and water high value crops and agricultural water consumption. By applying the Water Integrated Market (WatIM)-Model, benefits and costs of water management policies can be evaluated by identifying changes in quantities, prices and economic welfare, such as consumer and producer surplus. The WatIM-Model is a multi-market model combining water low and water high value crop markets and the water market with its supply and demand. Since the MDB is a complex system with different types of agriculture and water sharing rules in each catchment, economic variables are aggregated in the WatIMModel to examine overall trends and changes in the MDB. By the assumption that policy decisions on one market cause reactions on prices, supply and demand on other markets, market interdependencies can be derived. With these results, the merit of shifting production from water low value crops to water high value crops is examined and advantages and disadvantages of water management policies can be determined. This enables refinement of water management policies to optimise social, economic and environmental outcomes.Water market, water management policy, agriculture, sustainable water allocation, Resource /Energy Economics and Policy,

The Impacts of Water Management Policies on Agricultural Production in Australia - An Economic Analysis

In the Australian Murray-Darling Basin (MDB) the combination of severe and prolonged droughts and historic water management decisions to divert water for cultivation stressed water resources in such an intensive manner that wetlands went dry and rivers are now far from a natural flow. More appropriate water management policies must be implemented to restore ecological function. However, with 39 % of Australia’s total value of agricultural production, transitions in use need to be managed to minimise economic and social impacts on basin communities while they adjust. Recent studies estimate that industries with high water usage but lower or more volatile value products will be impacted more than higher value products. Therefore, this study’s focus is to analyse different water management policies and their impacts on agricultural production, particularly changes in production of water low value and water high value crops and agricultural water consumption. By applying the Water Integrated Market (WatIM)-Model, benefits and costs of water management policies can be evaluated by identifying changes in quantities, prices and economic welfare, such as consumer and producer surplus. The WatIM-Model is a multi-market model combining water low and water high value crop markets and the water market with its supply and demand. Since the MDB is a complex system with different types of agriculture and water sharing rules in each catchment, economic variables are aggregated in the WatIMModel to examine overall trends and changes in the MDB. By the assumption that policy decisions on one market cause reactions on prices, supply and demand on other markets, market interdependencies can be derived. With these results, the merit of shifting production from water low value crops to water high value crops is examined and advantages and disadvantages of water management policies can be determined. This enables refinement of water management policies to optimise social, economic and environmental outcomes