Assessing the Direct Economic Effects of Reallocating Irrigation Water to Alternative Uses : Concepts and an Application

Abstract

Irrigation water reallocations are
 playing an increasingly important role in both developed and
 developing countries. With growing urban and environmental
 water demands, rising costs for the development of new water
 supplies, and irrigated agriculture usually including the
 least economically valuable use of water, transfers of
 irrigation water to alternative uses are increasing.
 However, such reallocations are often controversial, and it
 is often questioned whether the benefits resulting from
 these transactions are large enough to outweigh the
 associated costs. This paper reviews the experience with
 irrigation water transfers, including the involvement of the
 World Bank. It discusses the problems of assessing the
 direct economic effects of reallocations, with a focus on
 the foregone direct benefits in irrigated agriculture.
 Because foregone direct benefits cannot easily be directly
 observed, they need to be estimated. However, assessments
 have shown widely differing estimates -- even when the same
 methodology was used. The paper reviews the methodologies
 and model specifications used for estimating foregone direct
 benefits; illustrates the impact of different model
 specifications on the magnitude of estimates of foregone
 direct benefits based on an application in an example case;
 and draws conclusions with regard to future efforts in
 assessing reallocation effects, including calculating
 adequate compensation for farmers. Because estimating the
 direct benefits of irrigation expansion is methodologically
 equivalent to estimating foregone direct benefits from
 reduced irrigation water supplies, the findings have
 implications for a broader range of water allocation decisions.