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[1] The legal framework in the EU is faced today with the new water framework directive (WFD) (60/2000) that sets up new criteria for water management, regulation, and pricing. The aim of this paper is to analyze the problem of water regulation in agriculture in connection to the WFD. This is done by setting up and testing a simulation model based on the integration of a mathematical programming model at farm level and an optimal regulation model at the level of irrigation boards. The model allows quantifying water demand and optimal regulation from the policy maker's point of view. When implementing both full cost recovery and the polluter pays principle, the results show likely major impacts of water pricing on farm income and employment. The optimal policy is a combination of pricing instruments related at the same time to crop mix, water consumption, and pollution. Transaction costs connected to policy implementation have to be weighted against the incentive benefits of volumetric pricing. Altogether, economic, social, and environmental issues have to be carefully considered in order to design suitable water policies.

Today the EU must deal with a new legal framework: the new water framework directive (WFD) (60/2000/EC). This directive sets up new criteria for water management and promotes the need for policy changes in sectors using water, such as agriculture. This paper deals with the problem of water regulation in agriculture by testing the results of innovative policy instruments, such as the joint regulation of water use and water pollution. The methodology—based on a simulation model that integrates a mathematical programming model and an optimal regulation model—makes it possible to quantify water demand and optimal regulation from the policy makers' point of view. The results show that, to meet the increasing social value attributed to water resources and pollution, major changes are needed in crop mix and policy design. However, changes in the economic role of farming and in the (cultural) attitudes of local populations towards agricultural work may have an even greater weight than water policy in the use of this resource.

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