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MODELLING WATER ALLOCATION PROBLEMS AT CATCHMENT LEVEL: THE CASE OF WATER MARKETS WITH RETURN FLOW EXTERNALITIES

Mixed integer non-linear programming was used to compare a market for consumptive water use and a market based on diverted water. Results showed that the return flow externalities associated with water markets for water diversion rights can be internalised into market decision making by restricting water transfers to consumptive use. The more restrictive water rights are the less water transfers will occur due to increased information needs. Economic, hydrological and crop growth simulation models must be integrated within a systems approach to generate more information on changing linkages between institutional settings, irrigation technology, economic efficiency and human value systems to advance meaningful water policy into the new millennium.