Specific area reduction results suggest that small farms are again, affected the most by this policy for the same reasons indicated earlier. Specific water use-intensity results suggest that for the range or water cost increases, very little effect has been made on all parameters, namely area irrigated, cropping patterns (switching to more water value crops), and reduced water per land area. Focusing only on the water application per land, for the three crops grown by all three farm types, it is clear that farmers are not price responsive at all. Increase of 50 percent in water cost yielded 10-13 percent reduction in water application per land unit for all farm types and crops with the exception of maize in small farms that was associated with a reduction of 42 percent reduction in water application.

<u>Changing labor availability and its cost reflect policies that increase off-farm</u> employment, increase in urban migration, or increased demand due to international trade. A general observation is that none of the crops grown on any of the farm types exhibited a significant change in water use intensity. The biggest change was in the case of small farms, where maize and sweet potato took a cut in water per ha of 14 and 11 percent, respectively. We can conclude therefore, that water is not a substitute for labor in this region. Farmers just reduce irrigated area as labor becomes scarce or more expensive, and this is how the irrigation water demand is affected. Small farms were also most hit by this policy intervention.

# <u>The Macro Model</u>

The regional-CGE framework is used to assess the impact of the following set of policy issues:

1. Progressive increase in water supply 2. Progressive reduction in water supply 3. Reduction of 50% in water supply for irrigation 4. Reduction of 50% in water supply for irrigation+investment of fee (based on shadow water value) collection in improved productivity by WUA.

5. Water transfer from Rio Bravo Basin to close by regions (North, Central) 6. NAFTA liberalization 7. NAFTA liberalization+elimination of PROCAMPO 8. NAFTA liberalization+reduction of 50% in water supply for irrigation 9. Application of 15% VAT on foodstuff+reduction of 50% in water supply 10. Elimination of Agricultural subsidies 11. Climate change regional differential impact on rainfall and water supply

# <u>Results of the Macro Model Simulations</u>

Cropping patterns in Mexican agriculture are clearly more sensitive to factor availability than to factor price (or total cost increments). So, in regards to surface water for irrigation in the RBB, policies aimed to increase total cost of water for agriculture may not substantially change behavior of farmers as they are reflected in current cropping patterns and usage of other factors. A similar result was obtained using the macro-economic model. That is, reductions in water supply for irrigation have much stronger effects on irrigated agriculture (and on the remaining of the Mexican economy) than changes in water costs to users. This finding is explained in part by the fact that in Mexico, total surface water costs are just a composite of water fees paid to the Water Users Associations or WUAs (i.e. water is not fully valued and its opportunity cost is extremely low). In addition, dry land and irrigated land rents respond differently, as demand for dryland increases.

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