A NET-BACK ANALYSIS OF IRRIGATION WATER DEMAND IN EAST-ANGLIA

In the United Kingdom, water allocation is governed by an administered licensing system, with charges unrelated to economic or environmental costs. Such a system is unlikely to result in an economically optimal allocation of water because it takes no account of the costs and bene fits of each water use. However, the efficiency of the system can be i mproved by performing a ''net-back'' analysis. This paper performs a n et-back analysis on irrigation water demand in the East Anglia region of the U.K. First, the simple net-back model is introduced, before exi sting data is used to estimate farmers' willingness to pay for irrigat ion water, both with and without the effects of agricultural and trade subsidies. This estimate is then compared with estimates of the long- run marginal cost of water. We find that farmers' willingness to pay ( their ''net-back'') is initially higher in general than the long-run m arginal cost of irrigation water. However, once agricultural subsidies are removed, the net-back becomes significantly negative for all crop s except potatoes. In other words, agricultural subsidies are the main factor in determining the profitability of agricultural production in East Anglia. If the markets for agricultural products and water servi ces were perfect, only potatoes would continue to be grown and irrigat ed. With this in mind, we offer some conclusions concerning the curren t mechanism for water allocation in the U.K. In particular, the licens ing decision could be used to attempt to replicate the allocation of w ater which would pertain if markets were perfect, as identified by our net-back analysis, thereby increasing efficiency. (C) 1997 Academic P ress Limited.