8 May 2008

Markets for Water -- Australia

The Australian government plans to buy $1.2 billion in water rights from farmers. The Murray-Darling River basin has been in drought for ten years, and irrigation is removing water that cities "need."

The government, laudably, is offering money to willing sellers. The farmers, who own the rights to water, will hopefully sell a portion of their rights to the government.

The best way to do this, I think, is run a "reverse auction" where farmers compete to sell rights by offering lower prices. Given a purchase goal of X units of water, the lowest asking prices for X units of water will be accepted -- probably with a limit on total sales by any given farmer/region to avoid "overfallowing;" see this.

Bottom Line: In many places, water is a limited resource. and its allocation to highest and best use is important. When the old allocation (usually to farmers) does not meet that goal, it must be reallocated. The worst way is to seize it legally or administratively (endless fights); the best way is through markets of willing buyers and sellers. Markets take money, but water is valuable and underpriced in most parts of the world. Up goes the price.

1 comment:

  1. Interesting article about Australian Water.

    Perhaps if legislation was amended so that water bodies or rivers had to reach a certain environment standard, which could be set so that farmers would have to relinquish water allocations. These could be set as minimum flows or have abstractions linked to flow bands.... or have set water quality indicators...

    You could then let the farmers hold on to the water allocation, which they could use when rivers/groundwater was high.

    If water quality standards (say Dissolved oxygen) or flows dropped below a cut off..... prosecutions would follow.

    Alternatively the state could compulsorily purchase headworks of rivers, then dam them for public water supply..... a bit like the model used by Melbourne Water.

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