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Missing markets for storage and the potential economic cost of expanding the spatial scope of water trade

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  • Donna Brennan

Abstract

A great deal of attention has been given in recent years to the question of externalities associated with water entitlements and how third parties can be protected without restricting opportunities for water trade. Yet one market failure that has received no attention at all is the missing market for storage that arises from the specification of water entitlements, particularly in Victoria where historically all storage decisions were made at the centralised level and where any additional carryover was treated as common property. The economic significance of the missing market for storage is demonstrated using an empirical model that represents the spatial-temporal pattern of irrigation water demand in the Goulburn Valley and decisions regarding inter-year storage of water in Lake Eildon. It is shown that, because irrigators have no incentive to trade-off the benefit of current use (or sale) with the value of water storage, there is an erosion of reliability when opportunities for trade are broadened. The empirical results demonstrate that the loss in economic value associated with reduced reliability are as large as the gains from trade, so there is no net benefit from trade. Copyright 2008 The Author. Journal compilation 2008 Australian Agricultural and Resource Economics Society Inc. and Blackwell Publishing Asia Pty Ltd.

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  • Donna Brennan, 2008. "Missing markets for storage and the potential economic cost of expanding the spatial scope of water trade," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(4), pages 471-485, December.
    • Handle: RePEc:bla:ajarec:v:52:y:2008:i:4:p:471-485
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    References listed on IDEAS

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    1. M. D. Young & J. C. McColl, 2003. "Robust Reform: The Case for a New Water Entitlement System for Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 36(2), pages 225-234, June.
    2. Brennan, Donna C., 2006. "Water policy reform in Australia: lessons from the Victorian seasonal water market," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(3), pages 1-21, September.
    3. Heaney, Anna & Dwyer, Gavan & Beare, Stephen & Peterson, Deborah C. & Pechey, Lili, 2006. "Third-party effects of water trading and potential policy responses," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(3), pages 1-17, September.
    4. Brennan, Donna C. & Scoccimarro, Michelle, 1999. "Issues in defining property rights to improve Australian water markets," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 43(1), pages 1-21, March.
    5. Donna Brennan, 2006. "Water policy reform in Australia: lessons from the Victorian seasonal water market ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(3), pages 403-423, September.
    6. Anna Heaney & Gavan Dwyer & Stephen Beare & Deborah Peterson & Lili Pechey, 2006. "Third-party effects of water trading and potential policy responses ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(3), pages 277-293, September.
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    Cited by:

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    2. Xie, Yang & Zilberman, David, 2014. "The Economics of Water Project Capacities under Optimal Water Inventory Management," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt6c24636b, Department of Agricultural & Resource Economics, UC Berkeley.
    3. Xie, Yang & Zilberman, David, 2015. "Water-Storage Capacities versus Water-Use Efficiency: Substitutes or Complements?," 2015 Conference, August 9-14, 2015, Milan, Italy 211894, International Association of Agricultural Economists.
    4. Chi Truong, 2012. "An Analysis of Storage Capacity Reallocation Impacts on the Irrigation Sector," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 51(1), pages 141-159, January.
    5. Truong, Chi H. & Drynan, Ross G., 2013. "Capacity sharing enhances efficiency in water markets involving storage," Agricultural Water Management, Elsevier, vol. 122(C), pages 46-52.
    6. Brooks, Robert & Harris, Edwyna, 2014. "Price leadership and information transmission in Australian water allocation markets," Agricultural Water Management, Elsevier, vol. 145(C), pages 83-91.
    7. Jonathan Yoder & Micheal Brady & Joseph Cook, 2016. "Water Markets and Storage — Substitutes or Complements for Drought Risk Mitigation?," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 2(02), pages 1-21, June.
    8. Adam Loch & Henning Bjornlund & Ronald McIver, 2011. "Achieving Targeted Environmental Flows: Alternative Allocation and Trading Models under Scarce Supply—Lessons from the Australian Reform Process," Environment and Planning C, , vol. 29(4), pages 745-760, August.
    9. Loch, Adam & Bjornlund, Henning & Wheeler, Sarah & Connor, Jeff, 2012. "Allocation trade in Australia: a qualitative understanding or irrigator motives and behaviour," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 56(1), pages 1-19, March.

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