Integrated Water Resources Management (Proceedings ol'a symposium licit) at Davis. California. April 2000). IAHS Publ. no. 272. 2001. 75 Examining physical and economic efficiencies of water use through integrated economic-hydrologic water modelling XIMING CAI, CLAUDIA RINGLER & MARK W. ROSEGRANT International Food Policy Research Institute, 2033 K Street NW, Washington DC 20006, USA e-mail: x.cai@,cgiar,org Abstract Improvement in the physical efficiency of water use is related to water conservation through increasing the fraction of water beneficially used over water applied. Enhancing economic efficiency seeks the highest economic value of water use through both physical and managerial measures. The analysis of these efficiencies at the basin level can take into account the downstream water re-use and tradeoffs across water use demand sites. Physical and economic efficiency measures are both useful indicators for water management at the irrigation system and river basin level, but may result in different implications for water policy. To explore the relationship between physical and economic efficiency, an integrated economic-hydrologic river basin model was applied to the Maipo River basin in Chile. Modelling scenarios are defined and policy implications from physical and economic efficiencies for basin-wide irrigation water management are analysed. Key words Chile; economic efficiency; irrigation efficiency; optimization model; river basin management; water use efficiency INTRODUCTION Economic efficiency of water use relates the value of output and the opportunity costs of water used in agricultural production to the value of water applied. It canbe expressed in various forms, e.g. as total net benefit, net benefit per unit of water or per unit of crop area (Wichelns, 1999). However, optimal physical irrigation efficiency does not necessarily correspond to optimal economic efficiency (Lynne et al., 1987; Sutton & Jones, 1994). This can lead to a misallocation of resources, e.g. when investments targeted towards increased physical irrigation efficiency do not contribute to increased economic efficiency. In this paper, we apply an integrated economic-hydrologic model developed by Rosegrant et al. (1999a,b) to explore the relationship between physical and economic efficiency under alternative scenarios and to derive implications for policy from the combined use of these two efficiency concepts at the river basin scale. Both physical and economic efficiency of water use are applied at the basin level, where potential re-use of return flows and declines in the water quality of return flows, on theone hand, and externalities in water use and the relative productivity of irrigation demand sites, on the other hand, canbe taken into account.