Estimating economic value of agricultural water under changing conditions and the effects of spatial aggregation

Given the high proportion of water used for agriculture in certain regions, the economic value of agricultural water can be an important tool for water management and policy development. This value is quantified using economic demand curves for irrigation water. Such demand functions show the incremental contribution of water to agricultural production. Water demand curves are estimated using econometric or optimisation techniques. Calibrated agricultural optimisation models allow the derivation of demand curves using smaller datasets than econometric models. This paper introduces these subject areas then explores the effect of spatial aggregation (upscaling) on the valuation of water for irrigated agriculture. A case study from the Rio Grande-Rio Bravo Basin in North Mexico investigates differences in valuation at farm and regional aggregated levels under four scenarios: technological change, warm-dry climate change, changes in agricultural commodity prices, and water costs for agriculture. The scenarios consider changes due to external shocks or new policies. Positive mathematical programming (PMP), a calibrated optimisation method, is the deductive valuation method used. An exponential cost function is compared to the quadratic cost functions typically used in PMP. Results indicate that the economic value of water at the farm level and the regionally aggregated level are similar, but that the variability and distributional effects of each scenario are affected by aggregation. Moderately aggregated agricultural production models are effective at capturing average-farm adaptation to policy changes and external shocks. Farm-level models best reveal the distribution of scenario impacts.