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The Evolution of Markets for Water

Theory and Practice in Australia

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.
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Chapter 2: Principles and Issues for Effective Australian Water Markets

John Freebairn


John Freebairn1 INTRODUCTION Most of Australia experiences a scarcity of water. Allocating more water for irrigation, households, industry, recreation or for the environment means less water for other uses. As a result of history, and especially the strategy of allocation primarily on a first-come-first-served basis, much of the present water allocation pattern departs from the efficiency norm where marginal social benefits are equated across the different alternative uses of limited water. Further, future changes in relative market prices, incomes, technology and so forth will call for a continuous process of reallocation of limited water resources. There is a growing consensus, supported by direct government initiatives at the Commonwealth and State levels, for greater use of effective water markets to allocate scarce water. This chapter explores some of the principles and issues to further the development of effective water markets in Australia. In particular, it considers some of the details necessary to turn into practice the general ideas canvassed in recent Council of Australian Governments (COAG) statements (including those of 1994, 2002 and 2004) and the White Paper released by the Victorian Government (2004). Section 1, by way of background and to provide a reference evaluation benchmark, briefly summarises the principles of allocative efficiency and the situations where market forces of price coordination are likely to be effective. The present state of water market development, and recent government policy initiatives, are sketched in Section 2. The main part of the chapter lists and evaluates some of the options on details of...

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