Control of water use in northwest Portugal

Over the past 20 years, growing water demand in Spain has greatly reduced river flows into Portugal. Increasing pressures are expected on northern regions of Portugal, such as the Entre Douro e Minho (EDM), to reduce water use and improve quality. Two models, one theoretical and the other empirical, are developed to analyze water use by EDM agriculture. The theoretical model considers firms consuming and polluting water with multiple inputs, outputs, emissions, interdependent externalities, and transaction costs. The empirical model considers a flexible quadratic restricted profit model of representative farms for the region. A programming approach is followed. The Maximum Entropy technique is used to recover the profit model. An unrestricted profit function is obtained from the restricted profit function. The theoretical results show that when water externalities are interdependent it is not efficient to control each externality independently. Several policies exist to control interdependent externalities. All policies can be cost-effective, in theory. In practice, the policies have many transaction costs. The links between inputs, emissions, and ambient effects often are unknown. The focus then is on reducing farm use of inputs causing externalities. The empirical results show an inelastic response to prices. Nitrogen and water are complements. Coordination is required to reduce the use of each input. The decline of the Common Agricultural Policy (CAP) supports reduces pressure on water resources. At prices expected in 2000, the subsidies required to maintain farm profits range from three million contos (20% nitrogen reduction) to twelve million contos (20% nitrogen reduction plus 30% water reduction). However, total predicted expenditure for the subsidy program is only 3.3 million contos, which is clearly insufficient. The marginal value of water is only 5.6 esc/m3. Receiving 50 esc/m3, EDM agriculture will release 450 hm3 of water, 60% of its use