Analyzing the Effects of Water and Agriculture Policy Strategies: An Iranian experience

Problem statement: Because of growing demand for water resources, increasing cost of supplying water and overdraft of underground waters, economists suggest water pricing policy to improve water allocation efficiency in Iran. While due to political risk, economic and cultural concerns, government tends to reject that advice. This study addressed questions of what policy alternatives to water pricing could be used to improve irrigation water allocation efficiency. Approach: Three policy options include water pricing, water complementary input factor taxes and output taxes were examined. In order to minimize the problems of bias produced by fully aggregated models, sample farms were classified into homogeneous groups of farmers by means of clustering technique. The analysis carried out by means of Positive Mathematical Programming (PMP), utilizing quadratic cost functions. Results: Results showed that effects of alternative policies were strongly dependent on group of farmers and that would create widespread effects on policy goals across clusters. The results also indicated that water pricing policy worked well in reducing the irrigation water use when the water price level was high and will have, in most cases, higher effects than other policy scenarios. Conclusion: Low level of input taxation wasn't a good driver in decreasing irrigation water demand and keeping the welfare level. Water pricing and output tax policies were better suited and effective than water complementary input factor taxation but both input factor tax and output tax policy at certain rates could be alternatives to water pricing policy. Water pricing policy had noticeable effects on social and environmental goals, while input and output taxes had small effects on that goals.