30 July 2009

Unfair Markets?

via JD, farmers in Australia are furious that the winning bid in a water auction came from a spa that caters to paying customers.

The spa bought 250ML of 1,200ML for sale. That water was part of 47,000ML (2.5%) of water saved in a government program to cap and pipe bores [PDF], a program half funded by landowners. ("Cap and pipe" means capping artesian wells and diverting their flow into piped systems.)

I have no sympathy for "outraged" farmers, since the water went to a buyer who paid more to put it to a valuable use (the spa's TOTAL economic impact is AUD40 million-plus), but I am curious to know who got the auction revenue. It seems that the government kept it to expand the conservation program.

I've no idea who bought the rest of the water...

Bottom Line: In a competitive market, farmers can rarely outbid urban/industrial buyers with higher values. They should not fear losing "all" the water, since cities cannot absorb the vast amounts on hand.

6 comments:

Keating Willcox said...

Farmers can always change crops, from water hungry rice, to wheat and other crops. There is a new direction toward Xeric crops that use little water. The free market will take care of this.

Steven said...

I am just a little concerned that we attribute complete "market" charateristics to agriculture. By that I mean that they "own" the inputs and thus can transact them in a market. My concern stretches to re-examining the concept of "public trust." Agriculture as a advocation, scenic asset, or "pride-of-community" type of amenity may be exhibiting characteristics that are more "public" than "private." Relegating them to a pure market may then not be in society's best interest irrespective of relative market "values." Thus, my love of California strawberries may not be able to compete with your love of a day in the Spa or a clean BMW in San Diego, yet when aggregated we may be missing some values that suggest public involvement in the marketplace (think subsidies) that keeps these amenities whose characteristics are both public and private.
Some of you economists are probably gagging on this comment by now. However, simple concepts like "let the market decide" are rarely robust solutions for issues we face in our complex world.

Jeff said...

The Strawberry won't go extinct, nor will the Strawberry festivals from reallocating water to urban uses at the margin through markets.

Salmon, on the other hand, are in real trouble.

David Zetland said...

@Steven -- your point is good, but tricky to implement. The notorious "cash cow" of switzerland (that makes more money per day in subsidies than the average african) is supported by just such an argument. How far can you go with "amenity" subsidies? Who decides which farmer is more photogenic?

@Jeff -- good point. That's because property rights for fish are too weak. See this post.

Marit said...

Hi Dave,

Not sure if you've been to Australia, but I fear that we are facing less and less water, so that fears of losing "all" the water are increasingly realistic, since cities need the limited amounts on hand too.

Cheers,
Marit

David Zetland said...

@Marit -- yes, I've been. I understand the shortage, but losing it "all" is unlikely, compared to ag using less, so that cities can get more (or using desal, when pipelines are too expensive...)