Efficient pricing and allocation of irrigation water: A model of the Murrumbidgee Irrigation Area

A model of the Murrumbidgee Irrigation Area with two linked components: the farms in the area and the off farm water delivery system is developed. Two versions of the model are formulated. The first version represents the practice of uniform pricing by water authorities where the differences in conveyance losses between farms are ignored while in the second version water authorities are assumed to charge an efficient price that reflects the cost of delivering water, including the conveyance loss to each farm. Each model version simultaneously yields optimal prices (uniform or efficient) of water delivered to farms and the allocation of water between farms and, for each farm the optimal allocation of resources over production activities and for each cropping activity the optimal mix of water use technologies. Uniform pricing of irrigation water entails some economic losses and consequently it is not economically efficient. In contrast, assuming negligible transaction costs there are no economic losses under efficient pricing. Preliminary results for the Murrumbidgee Irrigation Area show that a change to efficient pricing leads to improvements in farm financial performance and both irrigation and water use efficiency. It is also shown that investment in refurbishment of infrastructure is more profitable under efficient pricing than under uniform pricing.