The Evolution of Markets for Water

The Evolution of Markets for Water

Theory and Practice in Australia

New Horizons in Environmental Economics series

Edited by Jeff Bennett

This book presents a detailed picture of the evolutionary processes at work in water markets with a particular focus on theory and practice in Australia. Policymakers are striving to strike a balance between the pros and cons of a property rights/market based approach to the allocation of water resources, as opposed to an approach that centres on government regulation. The current movement in Australia is toward the use of markets, and numerous reforms are either underway or under consideration in that direction. This provides an ideal opportunity to observe the factors at play in determining the balance and hence the mix of policy instruments at work. The distinguished contributors offer a range of perspectives – economic, legal, environmental – and combine conceptual analysis with evidence from real policy decisions.

Chapter 10: Realising Environmental Demands in Water Markets

Jeff Bennett

Subjects: business and management, management and sustainability, development studies, agricultural economics, economics and finance, agricultural economics, environmental economics, environment, agricultural economics, ecological economics, environmental economics, environmental management, water


Jeff Bennett1 INTRODUCTION To achieve Pareto efficiency through market allocation, property rights over resources must be comprehensively defined and defended. This ensures that the full range of benefits and costs arising from their use are assigned and enforced. Competition between those with interests in a resource ensures that allocation is to the highest marginal net value use (Kasper 1998). The difference between the marginal net values of a resource prior to and subsequent to market place reallocations is known as the gains from trade. These gains from trade provide a powerful rationale for society to ensure the definition and defence of property rights. A complication to this logic arises when it is recognised that the definition and defence of property rights and their subsequent reallocation by trading in markets are costly activities in themselves. The existence of these so-called transaction costs limits the extent of gains from trade. Indeed if the transaction costs involved are greater than the potential gains from trade, then trade in a resource may prove unproductive for society. Put simply, in those circumstances, the costs involved in establishing and implementing trade are greater than the benefits that would result (Demsetz 1967). Such a situation can arise when a resource can be used to provide benefits that are ‘non-excludable’: that is, when the identification of beneficiaries is problematic (rights definition) and/or where beneficiaries cannot be precluded from use (rights defence). For example, if an ecosystem provides existence benefits to people – that is, the enjoyment experienced from the...

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