Abstract
Using sugarcane as a case study, this paper shows how an agronomic model can be used to estimate the marginal value of stored irrigation water with uncertain future rain. We do this by estimating production functions that have the water available for use as the variable factor of production (referring to them as allocation production functions). These differ from more “traditional” production functions which use the water actually applied as the variable factor of production (referred to here as irrigation production functions). We note that the amount of water actually applied is jointly determined by the amount of water that is available and by rainfall. Hence imperfect information vis‐à‐vis future rain means that irrigation water may be overvalued if the difference between the water available for use and the water actually used is not considered. We use results from simulations of sugarcane irrigation in northern Australia to demonstrate the potential magnitude of this overvaluation, and to examine the “value” of prepurchased irrigation water in various circumstances.
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