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Abstract

To mitigate environmental damage from the over allocation of water property rights to irrigation in Australia’s Murray-Darling Basin, the Federal Government has introduced a Buy-Back policy. However, the conjunctive nature of water resources in the Murray- Darling Basin is highly variable. Consequently alternative water property rights describing their reliability to supply water have been developed. Thus three critical questions concerning both the policy design and its outcome have been raised. Firstly, how much water will be transferred to the environment on an annual basis? Secondly, how will the environment benefit from this water? Thirdly, what are the economic consequences of restoring environmental flows? This article presents a state-contingent model of risk and uncertainty that allows for the specification of water resources and water property rights by water supply states of nature. This specification then allows for the optimal mix of water entitlements to be determined under a range of policy options and budgetary constraints that encapsulates the ability to supply water to environmental targets under alternative states of nature.

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