A method for assessing the importance of farm level capital investment decisions in the analysis of water reforms

Traditional approaches to estimating the potential benefits of water reform, including the introduction of water markets, have relied on short-run models which assume irrigation capital is either fixed or not a constraint on decision making. Other studies have incorporated a long-run decision framework, accounting for capital investment decisions but generally keeping short-run decisions relatively simple. This paper presents firstly an approach to modelling both long and short-run decision making on farm. This approach conceptually separates long and short-run decisions and incorporates many of the advantages of both linear and dynamic programming. The paper then describes the application of this approach in an Integrated Assessment project focused on water allocation options in the Namoi river catchment. The project requires an integrated assessment model to allow analysis of policy options in terms of their trade-off between agricultural production, water supplies and other water uses. A limited sensitivity analysis of the integrated model is provided as well as results from the application of the model to a set of policy scenarios. Overall the paper demonstrates the ability of the model to account for the dependence of decision making on existing capital infrastructure and costs of future investment required to take advantage of 'new' water supplies.