Lessons in Sustainability from the Murray–Darling Basin
Edited by John Quiggin, Thilak Mallawaarachchi and Sarah Chambers
Chapter 6: Investment as an Adaptation Response to Water Scarcity
Thilak Mallawaarachchi, Anthea McClintock, David Adamson and John Quiggin INTRODUCTION A crucial issue in resource policy is about how to deal with uncertainty surrounding the behavioural incentives for adaptation. The efficiency of utilising natural resources over time is conditional upon how adaptation takes place in the presence of uncertainty as moderated by public policy. If public policy fails to incorporate the dynamics of uncertainty on production systems, policy settings may undermine individuals’ ability to adapt to uncertainty. While further research could resolve some uncertainties associated with natural resource use (such as land and water) and agricultural production systems, other uncertainties such as the impacts of climate change and associated policies on future patterns of water availability will likely remain unresolved. The process of learning, in the interim, presents opportunities for innovation and flexibility to manage downside risk. The public policy concern in this situation is to weigh out the expected benefits of alternative investment opportunities, including the option of waiting, plus the costs of acquiring new information. In this chapter, we draw on state-contingent and real options analysis for investment choice under uncertainty. We consider the logic of short-term low risk and long-term high risk decisions for coping in the short term and adapting in the long run, under alternative assumptions for water availability. Implications for R&D policy are noted. The competition for water in the Basin is expected to intensify, with a new cap on diversions being imposed under the Basin Plan (MDBA, 2010). As water is withdrawn...
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