Theory and Practice in Australia
New Horizons in Environmental Economics series
Edited by Jeff Bennett
Chapter 8: Potential Efficiency Gains from Water Trading in Queensland
John Rolfe INTRODUCTION Economic reform in the water industry in Australia is an important issue. The supplies of regulated water have been constrained by restrictions on the construction of new dams as a consequence of environmental and political concerns, while demands have continued to increase from agricultural, urban and other users. The water industry is notable because price has rarely been used as a mechanism for allocating the resource, and when it has, it has only been used as a partial cost-recovery mechanism. Water prices have generally been set at very low levels through the public funding of major impoundments, with the effective subsidisation of many government operated distribution systems (Smith 1998). Two key themes that have driven recent water policy in Australia and internationally are that resource management should be ‘integrated’ across various sectors, uses and demands, and that water reforms should take a more ‘economic’ approach (Bauer 2004). The first theme refers to the realisation that water extraction and use has hydrological, ecological, economic and social consequences, and these need to be recognised to design more ‘sustainable’ water use patterns. The second theme refers to the trend to use more market incentives and other economic instruments to improve economic and social outcomes of water use. Over the past decade in Australia, there have been moves towards a more competitive and efficient basis for allocating water resources. These changes are being driven by the strategic framework for water sector reform adopted by the Council of Australian Governments (COAG) in...
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