The present paper proposes that markets for nature conservation on private land are missing because of the problem of asymmetric information. An auction of conservation contracts was designed to reveal hidden information needed to facilitate meaningful transactions between landholders and government. The present paper describes the key elements of auction and contract design employed and the results obtained from a pilot auction of conservation contracts run in two regions of Victoria. The pilot demonstrated that it was possible to create at least the supply side of a market for nature conservation and in conjunction with a defined budget, prices were discovered and resources allocated through contracts with landholders. The present paper compares a discriminative price auction with a hypothetical fixed-price scheme showing that an auction could offer large cost savings to governments interested in nature conservation on private land. The paper identifies some important design problems that would need to be solved before auctions could be applied more broadly including: multiple complementary outcomes, reserve prices, sequential auction design and contract design. Nevertheless, the paper does show that auctioning conservation contracts for environmental outcomes is an important new policy mechanism that deserves closer examination.

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Most economic assessments conclude there is no economic efficiency case for governments to provide drought assistance. However, significant public funds are allocated to farmers during droughts and there is a second-best case to improve drought policy design. In this article we show that the National Drought Policy suffers from adverse selection, moral hazard, incentive compatibility and government commitment problems. We use ABARE farm-level data that suggest that at least adverse selection was a problem in Victoria during the 2002-03 drought. These results are replicated at the national level. The current approach of the Commonwealth and state governments is ineffective because it is very difficult to design an efficient and fair drought policy that relies on ex post revelation of information. An alternative approach is investigated where incentives are designed so that farmers self-select into one of a number of drought policy agreements consistent with their capacity to prepare for drought.

The efficiency implications of different property right allocations when two environmental goods can be produced under the condition of economies of scope are analysed. It is assumed that an environmental agency -acting on behalf of the community -employs an auction-based mechanism to buy biodiversity services from farmers. However, farmers' production of biodiversity produces a second good as a by-product (e.g., mitigation of a river pollutant) that is valued by pointsource emitters who are engaged in a pollution trading market. The efficiency implications of allocating the property right of the good, mitigation, to either the agency or farmers are analysed. If the agency owns the mitigation then the agency can sell mitigation to point-source emitters, offsetting the cost of biodiversity. If farmers own mitigation, then they sell it directly to point-source emitters. Assuming similar transaction costs associated with each property-right allocation, allocating the property right to farmers improves efficiency, as farmers take account of their private information to make profit-maximising decisions about the supply of biodiversity and mitigation; the agency would have trouble accessing this private information.

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