Increased demand for water for municipal and industrial uses throughout Taiwan has intensified the pressure to re-allocate water from agricultural to non-agricultural uses. The full policy implications of such water transfers must not only account for the value of lost agricultural production and income, but also any loss in the social value of multifunctional benefits from agricultural production. Focusing on two northern irrigation associations in Taiwan, this paper empirically assesses the changes in rice production and multifunctional values under the scenario of transferring water from agricultural to non-agricultural uses. We also compare these combined multifunctional values of land in agricultural production with the per hectare compensations for water transfer in 2002 to evaluate the current water transfer mechanism. The empirical results have significant policy implications. Despite substantial reductions in production and farm income, the compensation levels in both irrigation regions exceed those required to compensate farmers for the losses in net farm revenue, and do so by substantial margins.

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