The move to decentralize and develop the inner areas of New South Wales in the first half of the century resulted in the development of several irrigation regions along the Murrumbidgee and Murray Rivers. Water was supplied to these regions at a low price, resulting in overuse of water and consequently environmental degradation. The increasing emphasis on the user-pays principle in the 1980s and an increase in concern as to the environmental damage in the region has resulted in a review of attitudes by the water supplying authorities. The provision of subsidized water is no longer considered desirable and proposals have been put forward to increase the price of water. in this paper, the results of a study to estimate the responsiveness of water demand to price in the Murray Valley are presented. The results indicate that a policy of cost recovery may result in a short term economic loss to the region, depending on the regime of prevailing commodity prices.