Efficiency gains from water markets: Empirical analysis of Watermove in Australia

We analyse supply, demand, and welfare measures in markets where the temporary trading of water rights is reasonably active and liquid on a weekly basis. We identify four important characteristics of water trading within the Watermove program: (1) demand is highly responsive to price changes, supporting evidence that farmers’ participation is driven by the advantages water markets provide in reducing seasonal risk; (2) some efficiency enhancing trades are prevented from taking place due to physical limitations of the delivery system, thereby reducing the ability of the market to move toward equilibrium. In addition, these limitations also created price premiums in some zones; (3) variations in the types of products traded are explained by differences in the administrative charges for trading and current drought conditions; and (4) relatively large gains have been made thus far, suggesting that water markets will expand and generate additional increases in consumer and producer surplus in the future.