Water Market Functionality: Evidence From the Australian Experience

Abstract

Market approaches to natural resource management have gained popularity over the last few decades. This study provides an encompassing analysis of the water market in the southern Murray‐Darling Basin (sMDB), Australia, in order to evaluate its performance and the importance of having various types of water rights traded in the market. We do so by investigating a set of market attributes, including price and price volatility, traded volume, number and the average size of transactions, and net import across a number of trading zones in the southern Murray‐Darling Basin. Our findings show that the price mechanism in the water market functions as intended, as the water prices signal the level of scarcity and reflect value that can be derived from water resources. Other factors like crop structure and institutional settings also play important roles in explaining differences in water market outcomes across the considered trading zones within the sMDB market. Overall, our findings document that water markets serve well their fundamental purpose in water resource management to allocate water toward its economically‐highest‐valued uses, and that various types of water rights traded in the market are meeting heterogenous needs of market participants in managing water supply and use.