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 thirdparty 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.

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A modelling framework incorporating relationships between agricultural production and groundwater hydrology was developed to estimate the bene¢ts of improved irrigation e¤ciency in the Riverland of South Australia. Increased irrigation e¤ciency can generate external bene¢ts to downstream users through reduced discharge of saline groundwater. In the Riverland these bene¢ts are large in comparison to the direct value of the irrigation water. However, the nonexclusive and site-speci¢c nature of these bene¢ts makes it di¤cult to fully internalise them through market instruments such as salinity credits. Achieving optimal irrigation e¤ciency is likely to require institutional arrangements that promote collective investment and public expenditure.

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The extent to which wools with different fibre characteristics can be substituted in textile production and consumption holds implications for Australia's international and domestic marketing policies. An analysis of price-induced substitution between Australian wools of different fibre diameters was conducted. Fibre diameter was used to parameterise cross-price relationships in order to estimate a system of demand equations for wools by diameter class. The results indicate that direct substitution takes place within a very limited range of fibre diameters. The use of product characteristics to parameterise price relationships may be extended to other graded commodities.The degree to which fibres can be substituted in textile production and consumption is an important factor influencing the demand for raw wool in Australia. Substitution can relate to competition between different grades of Australian wool and those produced by other exporters as well as competition between wool, synthetic and other natural fibres. The subject of this paper is the price-induced substitution relationships between Australian wools of different fibre diameters.Wool varies in a wide range of attributes which affect its processing characteristics and the quality of final products. Fibre diameter is the most important physical attribute of wool, as it closely governs the spinning capacity, strength and texture of yarns (Skinner 1965). Fibre diameter is inversely related to other important physical characteristics of raw wool, such as fibre length and strength. The demands for different grades of wool are closely related, but different grades are not perfect substitutes. Substitution in the production and consumption of textile products is reflected in relative price movements which occur in response to shifts in wool supplies and in the demand for final products.Substitution between wools of different fibre diameter has direct implications for Australia's international and domestic marketing policies. Richardson (1 98 1) discusses a number of implications of imperfect substitution between domestic wools for the efficient operation of the reserve price scheme. Issues regarding appropriate levels of price stabilisation for various wool types and the composition of stocks held by the Australian Wool Corporation depend, in part, on the extent of substitution within domestic wools. The Bureau of Agricultural Eonomics (1987) found that estimates of returns to wool growers from their cooperative expenditure on promotion are particularly sensitive to assumptions made about the substitutability of wools which are classified as apparel or non-apparel, on the basis of fibre diameter. 56Copyright 1990 The Australian Agricultural Economics Society SUBSTITUTION BETWEEN WOOLS OF DIFFERENT FIBRE DIAMETER 57A major difficulty in estimating demands for graded commodities is the degree of collinearity between prices. This collinearity is natural, resulting from substitution in demand and common sets of determinants of both demand and supply. To overcom...