Short and Long Run Approaches to Water Demand Estimation

Implementation of Council of Australian Governments (COAG) and State based water reform initiatives are likely to create significant structural adjustment pressures in irrigation areas throughout the Murray Darling Basin. There are concerns about the adequacy of short run models in both analyzing the impacts of these reforms and capturing the responses of irrigators to structural adjustment pressures. The legitimacy of these concerns are explored in this paper. A long run specification of the Murrumbidgee Irrigation Area has been developed, against which the short-run regional linear programming model developed by Jones and Fagan (1996) is compared. A range of policy settings are examined under these alternative specifications to investigate the level of divergence between the two approaches. This information provides an indication of the importance of accommodating strategic longer term changes in resource allocation in analyzing the impact of water reforms.