Geographical factors are defining the extreme variability in climate and water supply in Australia and, in the past, this was used as a rationale for the construction of large irrigation projects to deliver water to rural, urban, and industrial users. During this ‘expansionary’ phase of Australia’s water use sector, the cost of augmenting supply was relatively low and environmental considerations were secondary to the development imperative. As a result, water resources became over-allocated for extractive uses spurred on by consistent underpricing of water, which indicated a failure to reflect the true cost of water supply. As Australia’s water economy entered a ‘mature’ phase, it was no longer possible to increase supply cheaply as the most easily accessible water resources had already been captured. This was followed by widespread environmental degradation manifested in the Murray- Darling Basin, the nation’s largest river basin which hosts much of Australia’s agricultural production. Consequently, the focus shifted towards demand management, leading to a myriad of regulation aimed at increasing the allocative efficiency of scarce water resources. Towards this end, substantial government funding was injected into the various initiatives throughout the water reform process. Despite the on-going government activities in the area of water reform, the understanding of the actual economic impact and environmental outcomes of various water policies in practice remains limited. In the absence of such understanding, the effectiveness of various government water initiatives is ambiguous and inevitably compromised. The present study addresses this knowledge gap by establishing a method for evaluating the economic and environmental outcomes of environmentally-oriented polices that affect irrigated industries in a catchment. The method is based on an integrated biophysical and economic modelling approach, which enables spatial relationships to be captured accurately allowing a more realistic analysis. Information generated from a computer based biophysical simulation model form the basis of an economic optimization model with constraints pertaining to environmental targets and water supply limits. The economic model consists of a linear programming and dynamic programming component, and involves the optimisation of resource use from a catchment manager’s perspective, seeking to achieve efficient resource use but at the same time conform to given environmental objectives. This two-stage modelling process was required to determine the optimal intra-seasonal and inter-seasonal water allocation, given various catchment environmental targets. The interdisciplinary approach enables the economic and ecological outcomes of the catchment management policies to be simulated and assessed at a spatially explicit scale, due to the link to Geographical Information Systems (GIS) in the biophysical model. The overall objective was to create a decision-making framework that could be used to determine the least-cost means of meeting environmental targets and resource constraints. The solutions to the analysis are directly applicable to the case study, the Mooki catchment in northern New South Wales (NSW), but with an adaptable framework that can be applied to other catchments. Specific objectives include an evaluation of the possibility of using alternative irrigation systems, as well as an evaluation of the benefits that can be realised by establishing water market, in the light of environmentally-oriented catchment policies for the case study. The economic cost of achieving environmental targets pertaining to environmental flow requirements and salinity reduction, in the form of end-of-valley salinity targets, was explicitly calculated through the economic model. While salinity targets have been set for NSW catchments, the practicality of such targets is in question, given the substantial reductions in water allocation to irrigation activities, which is one of the key contributors to deep-drainage. An additional objective in this study was therefore to investigate the value of having deep drainage targets. A further consideration is the effect of “external agents” in the form of government plans to buyback entitlements from irrigation districts, or the possibility of significant water rights purchases from mining industries. The implications of external water market entrants on the regional agricultural industry were examined. Some conclusions and recommendations drawn from the results of this thesis are as follows:

• Alternative irrigation systems, including pivot and drip irrigation, are beneficial to irrigators in the Mooki basin, improving their water use efficiency and productivity. Pivot irrigation systems were shown to be the optimal system for most of the catchment, while drip irrigation systems are less economically viable due to the high cost of investment. Significantly, the viability of these irrigation systems is reliant on the security of water supply. It has been demonstrated that where groundwater is used in conjunction with pivot or drip, profit is consistently higher compared to where surface water is used. This relates to the uncertainty of river flow in an ephemeral system, which result in irregular irrigation water availability and, consequently, lower crop yields. To encourage investment in water efficient technologies, it is important there are ample and secure water supplies. Considering the recent cuts in groundwater entitlements in the Mooki basin, and the prospect of future reductions in both surface and ground water rights, irrigators in the region may be reluctant to make the investment. This is especially the case where the capital requirement for water efficient technologies is substantial. It reiterates the importance of secure water rights and clear policy implications for future supplies.

• It was found that the initial area-based water licensing led to an inefficient distribution of water amongst irrigators, and that a fully functional water market would enhance basin profitability since water is shifted to higher value uses in the downstream-most region of the Mooki. This leads to an efficient outcome, as irrigation areas contract and leaves more land available for conservation purposes. The presence of a water market also augments the value of irrigation technologies, leading to a shift away from tradition furrow irrigation towards pivot irrigation systems. In this light, it would be more effective for government funding to be used in promoting water trade than subsidising the cost of irrigation technologies.

• The opportunity costs of meeting environmental flow and salinity reduction targets are also reduced where water efficient technologies and water trading are utilised. However, where these environmental targets are stringent, the economic burden will be substantial even if water trading or irrigation technologies are used. Where a significant reallocation of water for environmental flows or reduction in salinity is envisaged, the resulting opportunity costs should ideally be justified by the environmental benefits that are generated.

• A dual-instrument, simultaneously managing water use and deep drainage through separate instruments, is unnecessary. Surface water caps alone provide sufficient