An Economic Framework for Sharing Water Within a River Catchment

Abstract

A framework for sharing a limited quantity, but also a variable quantity, of water between irrigation and the environment to maximize social wellbeing is developed and illustrated. The optimal water allocation equates the marginal social value of water across different uses. A simplified illustration allocates water from the Goulburn River in northern Victoria, Australia, between environmental water to increase numbers of Golden Perch (GP) fish stocks and irrigation demand for water for dairy farmers. The value of water for GP is developed using a combination of fish numbers as an ecological response function of water and Choice Model estimates of willingness to pay by Victorian households for improved fish stocks. Irrigation demand for water by dairy farmers is developed using a Linear Programming study. The complex ecological response functions require a numerical search model to evaluate the socially efficient allocation of water between the different uses. The shadow price of water as optimally allocated between the environmental and agricultural uses is developed as seasonal water availability varies. Further development of the framework could include identifying dependencies within the ecological responses and incorporating multiple ecological and agricultural responses in an expanded model. The policy implications include information on the socially efficient allocation of limited water between irrigation and the environment and the value of water when shared optimally between uses.