Water markets as a vehicle for reforming water resource allocation in the Murray‐Darling Basin of Australia

Water trade and the establishment of water markets continue to gain popularity among legislators as a vehicle for progressing the reform of the water resources sector in Australia. This has manifested itself at the most recent meeting of the Council of Australian Governments, where a range of changes to address the declining health of inland rivers included the strengthening of water property rights. These views appear to be premised on the belief that nonattenuated water rights are a prerequisite for maximizing the productive benefits of water and are broadly in line with notions often derived from neoclassical market theory. However, in spite of the apparent faith in the market mechanism, there is a growing literature illustrating the limitations of the market framework in the context of water resource management. Accordingly, there would appear to be grounds for a more cautious approach that recognizes the potential for market failures to emerge. This article explores the present growth of water markets and the legislative background that circumscribes them in the Murray‐Darling Basin. Recognizing the constraints imposed by the status quo, this study then examines the implications of stronger property rights for entitlement holders and the use of water markets in the context of the goals assigned to Australian water managers.