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.