Irrigated agriculture in Italy and water regulation under the European Union water framework directive

The legal framework in the EU is faced today with the new water framework directive (WFD) (60/2000) that sets up new criteria for water management, regulation, and pricing. The aim of this paper is to analyze the problem of water regulation in agriculture in connection to the WFD. This is done by setting up and testing a simulation model based on the integration of a mathematical programming model at farm level and an optimal regulation model at the level of irrigation boards. The model allows quantifying water demand and optimal regulation from the policy maker's point of view. When implementing both full cost recovery and the polluter pays principle, the results show likely major impacts of water pricing on farm income and employment. The optimal policy is a combination of pricing instruments related at the same time to crop mix, water consumption, and pollution. Transaction costs connected to policy implementation have to be weighted against the incentive benefits of volumetric pricing. Altogether, economic, social, and environmental issues have to be carefully considered in order to design suitable water policies.