This paper examines water use efficiency and economic efficiency with a particular focus on the Murray-Darling Basin of Australia and the stated policy goal of increasing environmental flows of water in the Basin. The different measures of efficiency are explained, and their implications for water reform and the efficacy of market based approaches to addressing the water scarcity issues and environmental flow needs are explored. Public policies to subsidize investments for improvements in irrigation efficiency are shown not to be currently cost effective compared to alternatives, such as buying water through water markets. The implications of these findings, and the factors that determine the demand for irrigation water by competing uses, can guide policy makers undertaking water reforms in the agricultural sector to mitigate the environmental consequences of overuse of water resources.

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