FARM LEVEL IMPLICATIONS OF RISING WATER COSTS AND ALTERNATIVE GOVERNMENT POLICIES
The overall impact of government policies and changes in underlying factor conditions on the region's development depends on the decisions of thousands of farmers responding to their individual investment opportunities. Expected farmers' profits provide the incentive to adopt a particular technology or alter the rate and direction of investment. Consequently, to understand better the implications of current trends and investment incentives and evaluate policy alternatives, it is essential to examine the impact of policies and factor prices on the profitability of various farming alternatives. Such an examination requires a microeconomic look at farm profits under alternative conditions. This chapter attempts to quantify the impact of different water costs and government policies on ( 1) the profits of a representative 1 0-hectare vineyard, ( 2) the optimal farm size, and ( 3) the relative profitability of permanent and annual crops. This analysis supports some of the prior conclusions such as how the higher water costs associated with ground water use have altered the rate and direction of agricultural investment and how subsidies and natural market failures associated with ground water use
have altered water use patterns. Moreover, the data and conclusions of this chapter are used in the following chapter to examine the profitability and, therefore, the likelihood of acceptance of alternative irrigation technologies under current and social water costs.