Stephen Beare

Third-party effects of water trading and potential policy responses *

A key feature of water policy reform in Australia has been the separation of water access entitlements from land titles and the establishment of markets for water. However, the separation of water entitlements from land failed to account for a number of characteristics that were implicit in the joint right. This has given rise to a number of third party effects as water is traded in an incomplete market. This paper describes four third-party effects of water trade; reliability of supply, timeliness of delivery, storage and delivery charges, and water quality and examines policy responses to address these effects. The discussion draws on the concepts of exclusiveness and rivalry to determine the applicability of property rights and other solutions to the third-party effects of trade. It is likely that many of the third-party effects of trade discussed in this paper do not warrant policy intervention at the national or state level, but intervention at the local level may be warranted. The costs of addressing some third-party effects may outweigh the benefits. Where there are significant gains from trade, the existence of these third-party effects should not been seen as a reason to impede trade.

Evaluating improvements in irrigation efficiency as a salinity mitigation option in the South Australian Riverland

A modelling framework incorporating relationships between agricultural production and groundwater hydrology was developed to estimate the benefits of improved irrigation efficiency in the Riverland of South Australia. Increased irrigation efficiency can generate external benefits to downstream users through reduced discharge of saline groundwater. In the Riverland these benefits are large in comparison to the direct value of the irrigation water. However, the non‐exclusive and site‐specific nature of these benefits makes it difficult to fully internalise them through market instruments such as salinity credits. Achieving optimal irrigation efficiency is likely to require institutional arrangements that promote collective investment and public expenditure.

Emulating Trade in Emissions Permits: An Application of Genetic Algorithms

Emissions permits are generally a second best option for dealing with site specific pollution. The outcome of trade in emissions permits when the economic welfare of market participants is linked spatially through production externalities is unclear. Trade will reflect the interaction of bargaining agents whose incentives vary with the relative physical location of both the buyer and seller. For the permit system to internalise the costs of pollution, information on who are the current buyers and sellers is necessary. This information corresponds to an understanding of the economic impacts of the physical externality, which in turn allows an improvement in the level and distribution of resource access or use. However, provision of such information is not characteristic of a competitive market in which rents associated with reducing the net cost of an externality are competed away. To achieve a more efficient distribution of entitlements, through the internalisation of pollution costs, the market structure must allow agents to capture these rents.

Meeting Environmental Outcomes

One of the main river management goals in the Murray Darling Basin is to strengthen the link between the river and wetland environments by augmenting natural high flow events with synchronised releases from storages. However, the volume, and timing of release, of water resources required to meet this goal is highly uncertain. An environmental planning framework is developed that generates well specified demand for environmental water and a set of high flow release rules. The framework provides clearly specified environmental objectives, giving rise to measurable performance, that are met at the lowest possible resource costs. The problem is specified as a constrained cost minimisation where the constraints define the characteristics of a successful high flow event. An optimal water release strategy is determined using a genetic algorithm. The approach is applied to a case study in the central reaches of the Murrumbidgee River and linked to a hydrological model of the entire river system. This link allows the systematic exploration of how alternative environmental objectives and release strategies affect the river system. The cost minimisation framework allows the costs of alternative strategies to be compared and options to reduce those costs to be explored.