Third-party effects of water trading and potential policy responses
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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 third-party
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.