Estimating Dairy Farms’ Demand for Water
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Resource Management's Act current “first come first served” method of
distributing water rights is fast becoming inadequate to handle this
increasingly over-allocated factor of production. Water markets or tariffs
are one way to achieve allocative efficiency. To establish such markets or
tariffs, it is imperative to estimate users’ responses to having, for the first
time, to pay for this currently largely unpriced input. This study seeks to
provide a viable “starting point” estimate of the response curve to water
price tariffs of dairy farmers – NZ’s largest fresh water consumers – using
the MPI dairy monitoring dataset. This paper suggests that under the
assumptions of inelastic input substitutability, the farms’ supply curves can
provide an approximation of the farms’ responses to at-site (irrigation cost
inclusive) changes of water costs.