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Investment in irreversible irrigation technology under uncertainty

Author

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  • Hafi, Ahmed
  • Heaney, Anna
  • Beare, Stephen

Abstract

Australian governments have agreed to develop and implement policies to promote more efficient use of water resources and improved water quality. Policy objectives may include incentives for investment in efficient irrigation technologies. However, the presence of large, sunk investment and the uncertainty of future returns will have an impact on the efficiency of such policies and the timing of the water savings and environmental benefits that they generate. A case study of Murrumbidgee Irrigation Area is used to quantify the effect of sunk investment cost and uncertainty of future returns on the effectiveness and efficiency of policy initiatives to increase water use efficiency. The results indicate that these factors slow adoption rates substantially. Policies that promote greater certainty with respect to water resource can potentially increase adoption rates and resultant environmental outcomes.

Suggested Citation

  • Hafi, Ahmed & Heaney, Anna & Beare, Stephen, 2006. "Investment in irreversible irrigation technology under uncertainty," 2006 Conference (50th), February 8-10, 2006, Sydney, Australia 139769, Australian Agricultural and Resource Economics Society.
    • Handle: RePEc:ags:aare06:139769
    DOI: 10.22004/ag.econ.139769
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    References listed on IDEAS

    as
    1. Heaney, Anna & Beare, Stephen & Bell, Rosalyn, 2001. "Evaluating improvements in irrigation efficiency as a salinity mitigation option in the South Australian Riverland," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 45(3), pages 1-17.
    2. Janis M. Carey & David Zilberman, 2002. "A Model of Investment under Uncertainty: Modern Irrigation Technology and Emerging Markets in Water," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(1), pages 171-183.
    3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. Ihli, Hanna Julia & Maart, Syster Christin & Musshoff, Oliver, 2012. "Investment and Disinvestment in Irrigation Technology – An Experimental Analysis of Farmers’ Decision Behavior –," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124532, Agricultural and Applied Economics Association.
    2. Hughes, Neal, 2009. "Management of irrigation water storages: carryover rights and capacity sharing," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia 47642, Australian Agricultural and Resource Economics Society.
    3. McClintock, Anthea, 2009. "Investment in irrigation technology: an application of real options analysis," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia 47934, Australian Agricultural and Resource Economics Society.

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